UBS Research forecasts 'value' plays for new year
Energy, bank, real-estate and telecom stocks are recommended for investors this year, based on their implied discount rate and their performance in 2012, according to UBS Research.
"With Thailand being the second-best-performing major market in 2012 (up 36 per cent in US dollars) next to the Philippines (up 41 per cent), asset allocators will no doubt be questioning the sustainability and value remaining within Thailand," said Raymond Maguire, strategist of UBS Investment Research.
Where to find "value"? UBS comments follow.
Retailer stocks have an implied discount rate (IDR) of 1-4 per cent (very expensive) assuming three-year trend growth of 20-30 per cent and 5 per cent in years 4-10. To achieve a reasonable value of 8 per cent IDR, longer-term growth has to trend at 15 per cent per year. In other words, earnings need to double over three years, then double again.
In the last quarter, consensus earnings were actually downgraded, although this was small (so far) and the market shrugged it off, as revenue growth remained strong. And there lies the issue. As long as strong top-line growth is maintained, growth investors will remain engaged and the stocks will remain highly valued. Consumer spending and related indicators are accelerating, which could continue to drive stocks higher.
Of the "expensive" retailers, Big C Supercenter (BIGC) is the least expensive but has the lowest return on investment. We have included Central Pattana (CPN) in the consumer sector despite it being part real-estate play. It has the highest valuation by far on this methodology despite the consensus assuming 46-per-cent trend growth for the three forecast years.
One needs to assume a further 20-per-cent annual earnings growth from years 4-10 to achieve an 8-per-cent IDR, or in other words, earnings have to increase 4.6 times over the next decade, or 11 times if we use the 2011 base year. Top picks: Major, CPALL.
Only two stocks in this universe. We have had an "underweight" recommendation with concerns that consensus earnings estimates were too high. Since then, the market has downgraded earnings and the stocks have been significant underperformers.
Channel checks also suggest small poultry producers have been going bankrupt, decreasing supply in the market, resulting in poultry prices increasing to Bt39 per kilogram in November from Bt32 in October versus the 2011 average of Bt45.
CPF has the highest IDR in the market except some small real estate plays. Major is the cheapest consumer discretionary stock. What is interesting is the advertising angle at its cinemas. Advertising is booming in Thailand, while cinemas are gaining share of advert spending due to the move to digital. Over the past 11 months, ad spending in cinemas has increased by 66 per cent year on year.
Energy, including petrochems:
This was the worst-performing sector relative to the SET Index last year. Six of the 10 energy stocks have an IDR over 10 per cent, a significant "deep value" signal for us, and interestingly, four of which are "cheap" based on consensus estimates of no (or negative) growth in the future.
Our top pick is PTT Global Chemical (PTTGC), where we forecast CAGR (compound annual growth rate) net-profit growth of 7 per cent from 2013-15, and an FCF (free cash flow) yield of 14 per cent. All the energy stocks are showing dividend yields of about 4-5 per cent, which we believe are secure and could grow. High FCF yield, dividend growth and earnings momentum have been the key style and factors that have outperformed in 2012. Energy may join that club in 2013. Top pick: PTTGC.
There are four financials that hit the IDR metric of 8 per cent or higher - TISCO, Krungthai Bank (KTB), Bangkok Bank (BBL) and (nearly)Bank of Ayudhya (BAY). We have an "overweight" stance on banks as our key market drivers for this year. Consumer spending/ credit cycle, corporate capex pickup and infrastructure spending are particularly prevalent for banks.
However, consensus estimates for the forecast three years of trend growth of 16-32 per cent per year look a bit aggressive. Foreign ownership remains the highest across the market. Outside of Kasikornbank (KBANK) and Siam Commercial Bank (SCB), stock performance relative to the market has been lacklustre, so there is more to go for.
In the strategy portfolio, we have included KTB and BBL. Our resident banks analyst, Worawat "Vip" Saisuphatphol, favours KBANK and BBL.
At sub-3-per-cent IDR, one of the most expensive sectors in the market. However, earnings momentum has been strong with upgrades. To achieve 8-per-cent IDR, earnings have to increase three to 3.5 times over the next decade. That looks challenging, as they are running at full capacity already.
Industrials (E&C contractors):
Major beneficiaries of the expected infrastructure boom. The sector was one of the best performing in 2012. Earnings must now deliver. To achieve 8-per-cent IDR, earnings need to grow 4.5 to seven times over the next decade. The highest IDR in the sector is Sriracha Construction (SRICHA).
This includes the cement plays that are benefiting and will benefit from the infrastructure theme. Our key call is Siam Cement, although it is no longer in the deep-value category with an IDR of 8.2 per cent, assuming consensus earnings growth of 20 per cent per year for the next three years. In reality, we probably need further earnings upgrades here to maintain recent strong stock momentum. This may materialise through pricing increases that the market is not factoring in yet.
We expect government infrastructure spending to quintuple from US$1 billion (Bt30 billion) last year to $5 billion this year, and as SCC's competitors are already running at 100-per-cent capacity utilisation, the additional demand could lead to price hikes.
Additional infrastructure investment has been discussed across Asean, from the Philippines to Myanmar, while a housing recovery in China could also tighten the supply-demand balance across the region. Top pick: SCC.
This is the "cheapest" sector on our methodology with 11 companies boasting an IDR of 10 per cent or more. Perhaps this is not surprising given the boom-and-bust nature of the sector over the past 15 years, and a higher equity risk premium is required by investors. For those stocks with an IDR of 15 per cent or more - that is, the cheapest - it may also reflect capital-raising risk and balance-sheet stress.
We remain very upbeat for the real-estate sector this year. We are not in bubble territory yet, with asset appreciation only running at 3-8 per cent per year. We would expect this to edge higher mainly because of land and labour price appreciation, rather than speculation.
The most surprising aspect of the sector is that if 2012 pay-out ratios are maintained in 2013, dividend yields of 4-6.5 per cent are commonplace. Top picks: Land & Houses (LH), Pruksa Real Estate (PS), LPN.
This sector was a volatile yet lucrative investment last year, and with the third-generation licences now issued, we can look to a rapid roll-out of the infrastructure and resultant boom in data usage. Capex will of course be required and front-end loaded, but capex/sales should decline from 2013. We are attracted to the high FCF and dividend yields/growth, and believe this will continue to be an important style driver in 2013. With the regulatory risk now receding post the 3G auction, we believe income investors will now be attracted to the sector.
In media, advertising spending is booming - expect earnings upgrades as pricing improves this year. Top picks: Advanced Info Service (ADVANC), BEC.
We favoured this sector last year based on strong tourism (Airports of Thailand, Thai Airways International), auto sales (for expressways) and infrastructure (BTS plans to launch an infrastructure fund). Those dynamics are still in place; however, we now downgrade this sector to "underweight" on valuation concerns.
Again we favoured utilities last year as we saw strong earnings momentum. A new round of IPP (independent power producer) bidding and the possible launch of infrastructure funds could continue to drive the shares. However, valuation now looks less compelling. Preferred play: Glow Energy (GLOW).