Earnings hold key to SET upward movement

The Stock Exchange of Thailand has been volatile because the rich valuations have outpaced earnings growth and recovery expectations. The SET Index has been trading at a price-to-earning (PE) ratio of 16.2 times this year, similar to the S&P500 (16.8x). At this level, Thai stocks are more expensive than in most European markets – Eurostoxx 50 Index is trading at 14.9x PE, FTSE 100 at 14.2x, and the German DAX at 13.9x. 

The valuation gap between Asean countries and Europe is widening. Indonesia’s benchmark Jakarta Composite Index and Malaysia’s KLCI are both trading at 17x, and the Philippines (PCOMP) at 20.6x. Asean growth is expected to accelerate next year driven by strong domestic economies and expanding investments. 

Meanwhile, Europe is at a crossroads, as major economies there remain weak. German output contracted in the second quarter, Italy has slipped back into a recession, and the French economy is flat, though Spain is expanding. And several indicators are pointing to slowing household and capital spending in the latter half of this year.

How much higher can the Thai market go? Probably not much without visible improvements to earnings and fundamentals. 

Third-quarter earnings will be the first challenge. Banks will announce results in late October, and the market will be watching for signs of improving loan growth and earnings. 

There is no room for earnings disappointment with stocks trading at over 16x PE. External risks are high as well. 

First, if the European economies show signs of improving, money could flow back into cheaper European stocks. Second, the “Shanghai-Hong Kong Markets Connect” event in October could draw money from elsewhere into both markets. This is a historic event where overseas investors will be able to access the Shanghai stock market through the Hong Kong Stock Exchange. The Shanghai Composite Index is currently trading at 9.2x PE and the Hang Seng Index at 11.2x.

Premised on the above developments, the Thai market could consolidate soon. But fortunately, the market will likely be supported by foreign investors buying on weakness, as most foreign funds are underweight in Thai shares. 

The best positioning now is to stick with big caps. 

 

Tisco Securities

With most stock-market sectors already pricing in a projected economic recovery in 2015, we continue to see limited near-term upside for Thai equities. Market volatility is also likely to increase as the SET Index approaches the strong resistance level of 1,600 points.

The government’s 11-area policy statement was rather vague and failed to excite investors. Tisco’s Economic Strategy Unit (ESU) does not expect more “major” stimulus packages, as several economy-boosting measures have already been announced and the new government is likely to focus on execution of big projects, particularly those related to infrastructure investment.

The US Federal Reserve’s decision to maintain interest rates at ultra-low levels for a “considerable time” triggered an improvement in global risk appetite, helping lift Thai share prices. Meanwhile the ESU now expects the first interest-rate hike by the Bank of Thailand to come in the second quarter of 2015 (1Q15 previously) as the inflation trajectory has shifted downwards.

Our banking analyst now sees very limited upside to her target prices although she recently published a note highlighting the “hidden value” of banks’ life-insurance subsidiaries. She believes that life-insurance value could add 7-16 per cent to her target prices for KTB (Krungthai Bank), KBANK (Kasikornbank) and SCB (Siam Commercial Bank).

Meanwhile we have upgraded our rating on ROBINS (Robinson Department Store) to “Buy” and expect 30-per-cent EPS (earnings per share) growth in 2015 and 2016. This is based on: 1) its plan to open at least three new lifestyle-format stores a year until 2016; 2) rapid growth in rental income from other retailers in its mini-malls; and 3) improvement in same-store sales growth from 4Q14F. We also rolled forward our DCF-based (discounted cash flow) valuation to end-2015, which lifts our target price by 13 per cent to Bt62.

Also making headlines was TUF (Thai Union Frozen Products), which last week announced the purchase of Norwegian canned-fish producer King Oscar – just two weeks after it bought French smoked-salmon producer Meralliance SAS. As King Oscar generates an EBITDA (earnings before interest, tax, depreciation and amortisation) margin of 12 per cent (versus 7-8 per cent for TUF), we expect the deal to prove value-accretive and thus maintain our “Buy” rating on TUF with an unchanged target price of Bt81.

 

Trinity Securities

Research Department 

Stock markets across the world are in an easing mode after the meeting of the US Federal Open Markets Committee. The Fed continued to emphasise the necessity for maintaining its monetary easing. That factor, combined with positive news from Europe, the SET Index could test 1,590-1,600 points this week.

One positive factor from Europe is from Scotland, where the campaign against independence from the United Kingdom took the majority of votes in a referendum. Investors’ concerns, thus, will ease in the short term, and that could prompt less market volatility and be good in the psychological aspect.

The European Central Bank’s first-round debt allocation, under the targeted long-term refinancing operation (TLTRO), was much less than expected last week. This will pressure the ECB to increase the size of purchase of asset-backed securities and covered bonds at its October 2 meeting. The announcement for big asset purchases will be significant for stock markets early next month.

This week, interesting local factors include inflow of a trigger fund that closed its sales on September 22. The fund set its targeted size at Bt1.5 billion, and this will support the market this week.

Now, hold stocks to let profit run. Pick safe stocks like big caps that are targets of fund inflows in the energy, communications and commercial-banking sectors.