Big-caps make a comeback

One-year returns for the SET look impressive but distribution is uneven. Many smaller firms are still struggling to tell their value storiesย 

CHIRATAS NIVATPUMIN

Discussing shareholder value and how companies can improve it, from left: Alexander Wood, a director of the investorrelations specialist Op8; Sarit Chokchainirand, a director of Op8; and Pathom Yongvanich, managing director of PYI. SURAPOL PROMSAKA NA SAKOLNAKORN

Investors enjoyed a banner year in 2007, as the Stock Exchange of Thailand shook off several years of moribund returns to post a total shareholder return of 46.93% for the year, according to the Post/PYI-Op8 Shareholder Scorecard.

Returns for 2007 well outpaced the three-year return for the SET of 22.35%. The gain of more than 20 percentage points between the one-year and three-year return for 2007 stands in sharp contrast to 2006, when the average three-year total shareholder return (TSR) beat the one-year return by just two points.

But a closer look at the data shows that only three sectors -ย  media and publishing, energy and petrochemicals -ย  actually posted one-year TSRs outpacing the overall market.

"Forty-six percent for the SET in 2007 sounds very good, but investors need to look at the distribution of returns," said Pathom Yongvanich, the managing director of PYI.

"Profitability growth as a whole was really flat. Still, there are pockets in the market that have done very well."

The Shareholder Scorecard, published annually by The Bangkok Post and the PYI Group, analyses the two factors that underlie investor returns -ย  capital gains and dividends. This year's analysis covers 396 companies listed on the SET and 35 on the Market for Alternative Investment.

Capital gains were the main driver for returns in 2007 -ย  according to the SET, net profits in 2007 dropped 10% from the previous year, or 4% if debt restructuring gains were excluded. But the SET index gained 26.22% for 2007 overall, with large-cap stocks in the SET50 index posting a 33.27% rise for the year.

"Large and medium-cap stocks are clearly coming back. Over the previous several years, small and medium-sized firms led the market. But for 2007, big caps were the best performers," Mr Pathom said.

According to PYI and Op8, companies with market capitalisation above 50 billion baht showed a 51.03% TSR for 2007, compare with 38.57% for firms with market caps from one billion to 50 billion.

Small-cap stocks did poorly in 2007, with a gain of just 1.95%. Indeed, small stocks have consistently underperformed their larger peers, with a three-year TSR of -6.58% compared with 24.48% three-year TSR for large-cap stocks and a 22.35% return for the overall SET.

The gains in 2007 represent largely the rebound in sentiment from late 2006, when the military coup and the Bank of Thailand's imposition of capital controls in mid-December spurred capital flight from the market.

"It's clear that foreign investment, focused in the SET50 and SET100, was the main driver for 2007," Mr Pathom agreed.

According to the SET, foreign investors were net buyers of 55 billion baht worth of securities in 2007, compared with a net buy position of 2.16 billion for local institutions and a net sell position of -57.18 billion for retail investors.

Mr Pathom noted that while small-cap stocks on the main board had consistently underperformed, the Market for Alternative Investment was a different story. The TSR for the MAI in 2007 was 108.6%, more than double the total returns offered by the main board. In terms of capital gains, the MAI index posted a 40.81% gain for 2007.

"The MAI has done very well, reflecting in part gains posted by new initial public offerings. The message I think is that for smaller companies, it's clearly better to go MAI than the main board," Mr Pathom said.

Alexander Wood, a director of Op8, said liquidity was the main problem facing many small companies in Thailand.

"There are things you can do in terms of investor relations to help. But if the free float is small, then the share price won't move. There just is no room for fund managers to come in," Mr Wood said.

Op8 is an expert in investor relations -ย  how companies can communicate with investors and stakeholders to best achieve "fair value" in their share price.

Poor investor relations is often the key factor for why companies underperform their peers. The converse is similarly true -ย  companies that have a strong IR programme and manage their shareholder structure can achieve better valuations and less price volatility than their competitors.

Mr Wood lamented the fact that all too many companies, particularly smaller, family-run firms in Asia, simply paid little importance to IR.

"All too many see IR as simply something to be managed by public relations units. There is a lack of understanding about what investors need," he said.

Mr Pathom agreed. "Too many companies think IR is just a burden, and they fail to recognise the benefits to shareholders."

An effective IR strategy can help firms distinguish themselves from their peers.

Mr Wood noted that for a relatively small market such as Thailand, share prices were particularly susceptible to global market trends and capital flows.

"A good IR strategy tries to separate your firm from the herd. There is definitely value to try to separate yourself. Otherwise, you are at the mercy of other factors," he said. "The goal is to achieve clear understanding. That way, if the company goes through a bad patch, investors won't worry."

Op8 takes a systematic approach to IR strategy, with the first step for any new client being to identify what is the fair value of a company.

The second step is to identify the reasons for any gap between your "fair" valuation and that of the market.

Mr Wood said that closing the gap requires a comprehensive, strategic approach.

"You need to look hard at your assets. The market tends to value at zero things it doesn't understand," he said.

"Consistent IR materials, systematic IR monitoring, responding to key outstanding issues, and targeting the right investor base. You need a strategic approach to try to explain what you are."

Sarit Chokchainirand, another director at Op8, said communications strategies needed to be tailored to the audience.

"In terms of transparency and governance, or information disclosure, you need to have the same approach regardless of the investor," he said.

"But the distribution channels will be different. For fund managers, for instance, you need to look at company meetings and one-on-one briefings. Reaching retail investors depends on a more mass market approach, such as the internet, press releases, and good relationships with market makers."

Mr Wood suggested strategic institutional investors should be the initial focus for any company rethinking their IR strategy.

"I think it's best to sort out the communications with strategic institutional investors. Once that's right, retail investors will follow," he said.

Mr Pathom concurred, adding that retail investors were now more savvy in making investments than in the past. "I don't want to generalise, but retail investors have become much more sophisticated, and are less prone to jump based on news or rumour. More are doing their homework."

Mr Pathom said investor demand was encouraging more companies to rethink their IR strategy.

"Part of it is due to shifts in the investor base. You are seeing more activity from private equity or hedge funds in the Thai market. These funds are taking 5%, 10%, 20% stakes and are looking for returns," he said.

"So they are putting pressure on management to devote attention to IR."

Mr Pathom shrugged. "It all starts with management. They need to care about their share price, and understand why prices are moving the way it is and how others in the sector perform.

"Firms need to treat share price the same as they would treat market share. Companies spend millions on advertising to market their products. Now, we see greater understanding that corporate communications, image branding and IR is equally a good spend."

But at the end of the day, IR is simply a tool to help close misconceptions between stakeholders and companies.

"IR isn't aimed at unrealistically boosting valuations. If you hype a stock, you are only raising expectations," Mr Wood said.

"And if you don't deliver, and disappoint the market, investors will just walk away. Your share price will just go on a roller-coaster ride.