SET's hit from months of political uncertainty relatively mild so far
April 16, 2014 00:00
By Therdsak Thaveeteeratham
The political protests, which started in Sam Sen Railway Station last October 31, have continued for more than five months and have not found solutions yet. Where they will go and how they will end are unknown.
The impacts have been widespread. Aside from affecting lives and assets and dividing the nation into two parts, the Thai economy has been affected, extending from losses of consumer confidence to slowdowns in spending, a lack of fiscal stimulus through state investment and suspensions of private investment. As a result, organisations have lowered their estimates for this year’s growth in gross domestic product from 4-5 per cent to 2.0-2.7 per cent with downside risks.
Similarly, forecasts for listed companies’ 2014 net profit have been cut since late last year. ASP Research lowered its forecast by 7.7 per cent in total. However, given last year’s low base, growth in earnings per share (EPS) stays at 12 per cent with downside risks. The SET Index dropped from negative political factors but rebounded quickly at times from foreign and local institutional investors’ buying sprees and from proprietary portfolios.
Since October 31, the SET Index has fallen by only 4 per cent. That is a slight drop compared with the above fundamental impacts. In terms of PER (price-to-earnings ratio), and with the estimated 7.7-per-cent drop in EPS, the index’s 4-per-cent decline means the Stock Exchange of Thailand is trading at a higher level of PER amid the political crisis.
After the Songkran Festival, the SET Index is expected to confront political pressure, which may reach its most critical point. Major issues that need to be monitored include the Constitutional Court’s ruling on the petition on whether the prime minister’s status will end, based on Article 182 (7) of the charter. If the verdict is not in her favour, a complete political vacuum will occur. It is difficult to predict what would happen next, and that would be a major risk for stock investment.
ASP Research recommends no more than a 50-per-cent holding of stocks. Stocks in portfolios should have profit following the global economy, business structures with overseas profit bases, or prices much below fundamentals.
Energy-petrochemical: Profit is driven by rising sales following production capacity. Selling prices follow the global economy. Stock picks: SCC (FV@Bt520), IVL (FV@Bt26), and IRPC (FV@Bt4.20)
Overseas profit base: STPI (FV@Bt28.46) with 100 per cent operation of steel structuring for LNG drilling base overseas.
Prices below fundamentals: ANAN (FV@Bt2.90). At the current price, its current PER is about 6 times. Its 2014 profit estimate carries low risk.
Head of Individual Client Research Group
The SET Index dipped 0.2 per cent week on week as investors wanted to stay outside the market ahead of the long Songkran Festival holiday.
On the economic front, we have seen deteriorating monthly data, consumption and investment for Thailand, citing a lack of confidence on political developments and the dysfunctional rice-pledging programme. At the same time, the political impasse is nearing a turning point. We anticipate that the political unrest should intensify in April after the Constitutional Court rules on whether Prime Minister Yingluck Shinawatra unfairly removed Tawin Pleansri as secretary-general of the National Security Council and the National Anti-Corruption Commission recommends impeachment of the PM on her alleged involvement in corruption in the rice programme.
The Stock Exchange of Thailand should move in a narrow trading range this week. Looking forward, we still have no official government, so no stimulus measures to restore domestic purchasing power will take place.
However, with a strong perception that the political unrest will likely end in the current second quarter, the stock market has already priced in that situation in our opinion. The SET recently traded on forward PER (price-to-earnings ratio) of 13.5 times compared with 11.1x for Asia and 10.2x for emerging-market countries, according to Morgan Stanley. That means the Thai stock market does not have a political-risk discount in terms of forward PER to Asia at all. So we doubt whether capital inflows will come in when the political unrest really ends.
Our strategy is to look for the best earnings performers in the second quarter. Our stock picks are CPALL, MAJOR, SAMART, and CPN.