The overall core profit outlook of the Thai equity market for the fourth quarter of 2019 and the first quarter of 2020 remains soft, with year-on-year declines expected for both quarters.
Earnings plays are largely limited to specific stocks rather than broad sectors. Domestic plays are generally better bets for profit growth than commodity-linked sectors. The passage of the fiscal 2020 budget will enable a new round of domestic stimulus, and we expect a new slate of public infrastructure projects to start opening to tender.
We expect fourth-quarter 2019 aggregate net profit of the Stock Exchange of Thailand to soar 29% year-on-year but to slip 4% from the third quarter. Core earnings, meanwhile, will be down 12% on the year and unchanged on the quarter.
Keep in mind that the big annualised jump in 2019 net profit after tax reflects the low base in the fourth quarter of 2018, due largely to inventory losses among oil and gas firms and heavy write-offs by other companies.
Core earnings this year remain weak for oil and gas and chemical firms, due to slimmer product spreads. The year-on-year increase in core earnings that we foresee is shared by eight out of 19 sectors, mostly domestic plays.
The key sectors likely to report solid year-on-year core earnings growth (more than 15% year-on-year) for the fourth quarter of 2019 are:
Finance: Swift loan expansion remains the driver of earnings growth. SAWAD, MTC, KTC and JMT should be among the companies reporting the strongest annualised profit growth.
Food: Other than beneficiaries of higher pork prices (CPF, TFG), food and drinks firms (CBG, OSP, M) should also report healthy growth, led by fatter margins.
Insurance: All three firms under our coverage -- BLA, TQM and THREL -- should see strong profit growth, driven by sales and margin expansion.
ICT: Both ADVANC and TRUE are likely to post year-on-year core profit growth, due to lower costs and rising average revenue per user (ARPU). The expected bottom-line jumps for DTAC and TRUE will be largely due to the absence of the write-off charges they marked to their income statements in the fourth quarter of 2018.
Transport: Core profit growth is expected to be led by airlines (against deep losses for the fourth quarter of 2018), while ground transport firms are likely to post single-digit growth.
Q1 OUTLOOK
We currently forecast a core profit decline of 3% year-on-year and a 13% drop in net profit for the SET in the first quarter of 2020. The weakness will remain concentrated in commodity plays (Oil & Gas, Chemicals) and sectors negatively affected by a strong baht (Electronics, Tourism, Oil & Gas and Chemicals).
We have partially factored in higher expenses for many firms from the new TFRS 16 accounting standard; we estimate that the net profit after tax of the affected companies will be squeezed by anywhere between 0.5% and 4%.
The sectors poised to post the best year-on-year core and net earnings expansion are Finance (strong loan growth, contained non-performing loans and provisions), Industrial Estates (greater land transfers, mostly by WHA), ICT (lower operating costs and higher ARPU), and Media (lower operating costs after shutting down loss-making TV channels).
Forecast cuts continue: Commodity stocks remain subject to further profit forecast-cutting by analysts, due to lower chemical product prices, slimmer spreads and the strong baht. A quarter-on-quarter oil price bounce (Brent crude was up 10% quarter-to-quarter at the end of 2019) may make for inventory gains, but core earnings (gross refining margins and chemical product spreads) were weak on a quarterly and annualised basis in the fourth quarter of 2019.
Several domestic sectors could also see cuts in consensus profit forecasts, due to weakening demand trends in the second half of 2019, which erodes confidence in the scope of the recovery in 2020.
Our SET earnings per share (EPS) forecasts of 92 baht for 2019 and 102 baht for 2020 are roughly in line with the consensus numbers of 93.3 (2019) and 101.1 baht (2020).
Risks include weaker economic momentum, both domestic and global; a less-dovish stance by the US Federal Reserve than the market expects; falling oil prices; and geopolitical tensions and trade conflicts.
