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Drought expected to seriously affect some sectors in stock market

Jan 25. 2020
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By The Nation

Stock analysts estimate that the ongoing drought situation in the country will depress share prices in retail, construction materials, and power plant sectors, while water manufacturers’ shares, such as East Water Group (EASTW) and TTW, may not benefit from the increasing water demand due to rise in the cost of water diversion.

A stock analyst at Yuanta Securities (Thailand) said that the drought had come earlier this year than in previous years.

The Thai Meteorological Department has forecast that the drought will last long, until June this year, while the amount of rain will be below the normal of 3-5 per cent. Fourteen dams are in a critical condition, while the combined capacity of their water has decreased by approximately 41.1 per cent.

“In the past, drought often caused short-term impact on the Stock Exchange of Thailand [SET] Index, but it also caused indirect effects,” the stock analyst said.

“Shares in food benefited from the rising meat price, while shares in beverages tended to rise during the drought season. For example, shares in this group rose by 9 per cent in 2015, 12 per cent in 2016, and 34 per cent in 2019.”

The stock analyst added that EASTW will benefit because industrial estates in the eastern region are impacted less by the drought, while TTW will receive direct impact because they provide services in the central region and still hold shares in CK Power (CKP), which has a hydropower plant business.

Wijit Arayapisit, strategist from the research department at Maybank Kim Eng Thailand, said that the drought situation this year is quite worrying.

“If the situation worsens, the consumer goods industries will be affected because the drought will lead to lower income for farmers,” he said.

“Consumption by farmers is an important part of the Thai economy with the proportion of consumption to Gross Domestic Product [GDP] of 52-53 per cent.”

He said that shares in power plants and public utility groups may be affected by the drought as well. However, the executive management of TTW is not worried about the current situation because they believe the company will still be able to produce water as normal.

Tisco Securities foresees EASTW benefiting from the drought situation, as the increase in water demand from the industrial sector and other consumption would mean the company does not have to offer a special price to the waterworks authority

“The price of raw water will increase to Bt10.9 per cubic metre, while a new price plan will increase the water price by 5-15 per cent by March this year,” the stock analyst said.

“We recommend buying this stock with a fair value of Bt14.20 with the returns from dividend of 4.1 per cent per year. Recently, EASTW’s water reserve was at 40 per cent and water usage from the Nong Ko water reservoir has limited the negative risk.”

Asia Plus Securities added that according to the history of EASTW’s share price during drought seasons in the past, the stock price tends to outperform the market.

“For example, EASTW's share price rose by 7.1 per cent during the dry season in November 2015 to April 2016 and November 2018 to April 2019, much higher than the SET Index, which rose only 0.48 per cent,” the stock analyst said.

Meanwhile research analyst at Trinity Securities, Nuttachart Mekmasin, said that the market had underestimated the impact of the drought, which was more severe than in the past.

“Currently, shares in the retail and construction materials group are still not affected by this negative factor. However, if the situation worsens it will eventually affect the farmers’ income,” he said.

He said that the EASTW share may not benefit as forecast by other stock analysts because the company may not have sufficient water to meet the increasing demand.

“The company may have to divert water from other sources, which will increase the cost of water per unit, while it seems that EASTW's share price has risen due to the drought. If the situation gets worse from March to April, we may be able to see a sell-off,” he said.

He added that investors who want to buy EASTW share should consider the company’s dividends by looking at the support of Bt10.5 to Bt11 and expect dividends of around Bt0.8 per year, or a return of 7 per cent.

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