Risks flagged on takeover bets abroad

S&P Global Ratings pointed to a trend in which past rounds of deal-making by listed Thai companies haven’t always brought rewards.

The agency’s flagged concerns coincide with a warning from Bank of Thailand governor Veerathai Santiprabhob that financial markets could face a bigger correction than that seen early this month. He added he is also worried about weaknesses in smaller firms and persistent high household debt.
Xavier Jean, senior director of corporate ratings of S&P Global Ratings, yesterday said that Thai corporates had made aggressive plays in mergers and acquisitions in recent years. In 2017, they accounted for more than half the M&As in the Asean region, Jean told a seminar hosted by S&P Global Ratings and Bangkok-based TRIS Rating Co.
Thai listed companies, conglomerates in particular, have been investing heavily in the Asean region, either buying out local enterprises or swooping on parts of the operations of global companies. These firms include Thai Beverage, CP ALL and Siam Cement Group.
Jean said Thai companies had spent a lot of money on investment but, in many cases, these outlays are not yet generating the sought-for additional profits. He declined to name some of these companies.
Asked if this was a big concern, he said it was a situation worth monitoring. “I’m a bit worried,” he told reporters.
These firms have to expand their operations overseas as the local market offers limited growth and they can find cheap loans, the analyst said. But better economic conditions in neighbouring countries mean the deals that arise are expensive. If the market is not good and global interest rates rises, then this combination would affect their businesses, he said.
Jean said the outlook for revenue growth and cash flows is looking marginally better but the operating environment is unlikely to see a return to the heydays of early in the decade. Revenue growth for listed firms is projected to be 6-8 per cent this year, while long term growth is only 3 per cent.
He also pointed out that cash inflows of Thai firms still do not cover cash outflows, so they companies will continue to rely on cash and debt in order to keep growing. Thai firms have been holding less cash compared with their peers in the region, Jean said, adding that this was due partly to them being generous on dividends for shareholders.
Veerathai, speaking at the forum, aired his concerns over the prospect of a bigger market correction in the wings, and over the impact of the projected higher interest rates worldwide.
The correction seen over the past month suggested investors were worried about the risk of a faster pace of interest rate rises and of inflation increasing more than previously thought.
“There is a risk of a bigger market correction possibly arising from a mismatch of market expectations and the complexity of economic factors interacting," Veerathai warned, referring to the sharp falls in global stocks that broke out this month.
The US Federal Reserve may raise its policy rates faster and this would lead to higher global interest rates. Firms that are too dependent on foreign borrowings would be affected, the central bank chief said.
However, Thailand need not follow the US lead in interest rate increases as the country has ample f liquidity thanks to a large current account surplus, at 10.8 per cent of gross domestic product last year, he said.
But Veerathai was more worried about weakness in small and medium-sized enterprises (SMEs) as many of their loans are still classified by banks as non-performing loans. 
NPLs conditions have been improving but small firms are still struggling to cope with fast-changing technology that has affected their competitiveness, he said. “SMEs are fragile, as their ability to pay debts and making profits is limited,” said Veerathai.
While household debt has been recently dropped from a peak to 78.3 per cent of gross domestic product, it remains high, he said.