As the P/E ratio rises, go for safe stocks to escape
July 21, 2014 00:00
By Therdsak Thaveeteeratham
Since May 22, the SET Index has risen by 9.3 per cent on expectations on the economy after political risks declined. Foreign investors' buying spree returned consistently.
Between June 27 (net sales worth Bt36 million on July 4 alone) and July 17, net accumulative buys amounted to more than Bt20 billion. Most investment came from switching from group to group to buy stocks on positive news for each group.
Recently, heavy buying has gone to commercial banks on performance and trends. Based on data up to Friday morning, the combined second-quarter net profit of five commercial banks (BBL, KBANK, SCB, TMB and TISCO) totalled Bt39 billion, up 6.78 per cent year on year and 10.68 per cent quarter on quarter. These results were better than expected. Earlier, their profit was estimated to be steady.
Rises in net profit resulted from higher NIM (net interest margin) after declines in deposit costs in light of the lack of competition for deposits and a cut in the central bank’s policy rate, and lower-than-expected loan-loss provisions, which reflects easing concern over the economic situation. Such earnings improvement has led to upward revision of commercial banks’ earnings forecast and fair values. It’s possible to see speculation consistently.
Stock picks: SCB (Siam Commercial bank, FV@Bt220) and KBANK (Kasikornbank, FV@Bt260).
Another interesting point is progress on the state budget for fiscal 2015. The National Council for Peace and Order agreed on a budget of Bt2.575 trillion, up 2 per cent or Bt50 billion from the previous fiscal year. The budget is set to be in deficit of Bt250 billion.
Of the total budget, 78.7 per cent is current expenditure (down from 79.9 per cent in 2014), 17.5 per cent investment expenditure (equal to fiscal 2014), 2.2 per cent debt repayment (up from 2.1 per cent in 2014) and 1.6 per cent repayment to fiscal balance (up from 0.5 per cent in 2014). Such issues are expected to regain consumer and investor confidence for the rest of this year. Gross domestic product this year is expected to grow by 2 per cent, while the Bank of Thailand expects 2015 growth of more than 5 per cent, and that will be positive for investment.
The SET Index rose consistently for the said reasons. The PER (price-to-earnings ratio) has increased to above 16 times and the PER at the end of 2014 rose to above 15.5 times. The PER at the end of 2015 is forecast at 14 times. Based on EPS (earnings per share) growth of 7.74 per cent in 2014 and 12.56 per cent in 2015, which are quite high, there remain no factors to cause heavy market corrections. In the short term, two strategies are set.
1) Existing portfolios: For stocks with prices above 2014 fair value, find time to sell, based on stop profit points to lock in minimum profit. Usually, stop profit points are set at the level above costs but below market prices. If stock prices rise, stop profit points can be higher, and sell stocks when stock prices turn to touch stop profit points.
2) New investment: Focus on safe stocks, with growth, whose prices are below fair value and dividend yields are higher than 5 per cent per year. Stock picks: TTW (FV@Bt13.30). Stock for accumulation: TTCL (Toyo-Thai Corporation, FV@Bt42.68)
Head of Individual Client Research Group
The Stock Exchange of Thailand gained 1.12 per cent from the previous week to close at 1,534.54 on anticipation of a Thai economic recovery.
There were foreign inflows to Asia including the Thai stock market after China and Japan released improved economic data in June, which brought optimism for further expansion in the second half. Given more liquidity flushing into stocks, the SET rose to a previous peak level of valuation – based on forward PER (price-to-earnings ratio) of 15.1 times on 2014 estimated earnings.
On reward-to-risk ratio, we believe that market correction will likely happen soon, probably when second-quarter 2014 earnings and dividend announcements are made in August. Even though we anticipate that Thai listed companies should deliver more positive momentum in earnings, some stock prices partly appear to reflect 2015 valuation. It implies that market risk is rising immensely. So we suggest locking profit, as people are mostly optimistic on market upside.
Equity Analyst and Strategist
Last week, the SET Index increased 15.40 points or 1.45 per cent. The market was positively driven by China’s improved economic figures, consistent net buys of foreign investors and better-than-expected earnings performance of commercial banks. Late last week, the stock market moved with volatility on violence in the Middle East and terrorism against the Malaysia Airlines plane in Ukraine’s airspace, prompting profit-taking in risky assets across the globe and capital moving into safe havens like gold and US Treasuries.
We maintain a positive view on medium-to-long-term investment. We also take caution in the short term after the SET Index rose above the 2014 target of 1,510 points. However, it’s still below the 2015 target of 1,600. This implies limited upside in the short term.
An upgrade of earnings estimates is necessary to push the market in the next periods. The euro’s reduced volatility and results from the European Central Bank’s TLTRO (targeted long-term refinancing operation) measure encourage carry trade to emerging markets. That is a positive factor for the next one-month period. In the short term, the stock market is not likely to drop sharply. We expect the SET Index to move in a range of 1,520-1,550.
We expect the SET Index to fall early next week after end of earnings announcements of commercial banks. There remains a chance for speculation on laggard stocks in price performance and valuation. There is also opportunity for speculation in small caps with good stories.
Stock picks: AP, SPALI (Supalai), TICON (Ticon Industrial Connection), HEMRAJ (Hemaraj Land and Development), CPF (Charoen Pokphand Foods) and BCP (Bangchak Petroleum). Stocks for speculation and stop loss: AQUA, TPOLY (Thai Polycons), GEL (General Engineering) and EA (Energy Absolute).