Low debt, high cash flow makes thai bigcaps 'winners'

The report, released last week, provides guidance for investors to assess stock attractiveness under the current creditcrunch environment, in which financial institutions tighten their lending standards and widen credit costs.

The winning companies are those nonfinancials in the SET50 that have low debt and are capable of investing at their normal pattern with their own internally generated cash earnings, even with a 20percent reduction in cash flow from operations.

Among the attractive ones are Total Access Communication, Hana Microelectronics, Thai Plastic and Chemicals, and Thoresen Thai Agencies.

"Surviving companies are those with low financial leverage relative to their cash earnings," Citi Thailand said.

"Also, winning companies must be able to invest as planned to maintain their business presence and competitiveness with their own cash flows from operations."

After studying 42 nonfinancial companies in the SET50, Citi Thailand reached the following conclusions:

lTwentynine companies - 70 per cent of the nonfinancial SET50 companies or 83 per cent in terms of market capitalisation - are selffinancing, generating enough cash flow to meet capital expenditures.

- There are 15 companies that can pay down all debts within two years with cash flows from operation and investment.

- Twothirds of them can pay down all outstanding debts with cash on hand.

- Among these selffinancing companies, it would take them on average 4.4 years to pay down existing debts, leaving the remaining cash flows to existing equity holders.

"This confirms that Thai big caps are in general not financially leveraged, especially relative to cash earnings, and will unlikely be negatively affected by the global credit crunch," Citi Thailand said.

There are nine companies that pass Citi Thailand's criteria as winning candidates with low debt and quick payback. They are: Thoresen Thai Agencies, Precious Shipping, Hana Microelectronics, Delta Electronics (Thailand), Regional Container Lines, TPI Polene, Thai Plastic and Chemicals, Total Access Communication and MCOT.

Citi Thailand has adopted two criteria in selecting winning companies in this environment.

First, the cashadjusted EV to CFOCINV ratio (equity valuation to cash flow from operation minus cash flow from investment) - which reflects the scenario that companies rely solely on cash earnings to fund investment as well as to meet existing debt and equity holders - is eight times or less. This means cash earnings excluding investment return to all stakeholders at 12.5 per cent per annum. Given the average debttoequity ratio of 0.35 and average debt funding cost of 8 per cent MLR or less, this implies a return on equity (marketvaluebased) of 14 per cent.

Second, the net debt to CFOCINV ratio is 2 times or less. It takes a maximum two years to pay down all debts with internally generated cash earnings after investment.

The above nine companies are ranked by the cashadjusted EV to CFOCINV ratio. All can pay down their debts within three years. The market cap weighted average ratio is 6.4 times, implying a return to stakeholder and equity investors of 15.6 per cent and 19.2 per cent respectively.

"Interesting to note, they [nine stocks] are in shipping, electronics, materials and TMT [technology, media and telecommunications]. Except TMT, which is domestically oriented, the others are in global cyclical sectors whose earnings visibility is highly uncertain. As a result, we apply an assumption of a 20percent drop in cash flow from operations but unchanged investment spending to all companies," Citi Thailand said.