Picking the winners

Property, building and commerce sectors ride consumption-led recovery to deliver best returns to shareholders over 12 months, but many other good-value stocks exist for investors who know how to judge them

CHIRATAS NIVATPUMIN

Stock investors have enjoyed a pleasant surprise for the year to date, with the Stock Exchange of Thailand index up 20% since January.

This despite investor jitters over corporate accounting in the United States, relatively disappointing export performance and growing questions about the country's medium-term competitiveness. Gains have helped spur a revival in interest in the capital markets.

Credit the rises to a growing consumer-led recovery, plentiful market liquidity and a concerted effort by regulators and policymakers to promote the exchange as a funding source for companies and a stable long-term savings vehicle for individuals. With listed companies posting nearly a 30% increase in profitability in the first half from the year before, it comes as little surprise to see share prices rising for almost all sectors on the exchange.

But a closer look at the numbers shows a more diverse picture, suggesting that investors _ and corporate executives _ would do well to consider the factors affecting share prices.

Shareholder returns ultimately hinge on two factors, dividends and capital gains. Corporate profits and a firm's financial structure provide the main drivers for dividends, while market expectations about a company's future position steer long-term share prices.

The Shareholder Scorecard prepared by L.E.K. Consulting and the Bangkok Post aims to help investors pick winners by ranking listed firms by their total shareholder returns, using market prices and dividend performance as of the end of June 2002, ranging from a one-year to a 10-year basis.

Leading the one-year sector performance figures, property stands dominant, with a total shareholder return of 163.9% compared with a gain of 21.3% for the overall market.

Other top winners, such building and furnishing materials and household goods, reinforce the message that the economy has turned the corner, driven by Thai consumers, according to J. Sharad Apte, a director of L.E.K.'s Bangkok office.

``We see two sides of the spectrum. On one hand, you have banks, still in a recovery mode from the crisis, and telecommunications, which has been struck by the global downturn,'' Mr Apte said.

``And on the other hand, there's property, commerce and construction, all sectors which have benefited from the domestic recovery.''

Hardest hit among all sectors was communications. While the market leader in 10-year sector returns, telecoms was down an average of 24.2% at the end of June on a one-year basis. Even the best sector performer, cellular operator and perennial blue-chip Advanced Info Service, posted a 10% decline in total shareholder value for the year.

While some blame can go to the general aversion investors worldwide have had to telecoms following the collapse of the dot.com bubble, some of the problems industry giants are facing in North America or Europe are the same as those confronting local players.

``The transformation of the competitive landscape has been a big factor,'' Mr Apte said.

Indeed, 2002 has been a tumultuous year for the telecoms sector, led by the entry of TA Orange in the cellular market. Competition for users has led operators to unlock handset codes, causing an erosion in margins and revenue. Market liberalisation and the privatisation of the state-owned Telephone Organisation of Thailand and the Communications Authority of Thailand has introduced additional uncertainties about the future position of local operators.

``The competitive position of some of these players has eroded a bit. But has the sell-off been irrational,'' Mr Apte said.

``Perhaps. But just as the Internet boom saw irrational gains in share prices for dot.coms, here, we're seeing the response on the opposite side.''

Bob Neapole, another director in L.E.K.'s Bangkok office, notes that several local players were suffering from the same issues as larger telecom firms overseas.

``Take France Telecom, which is struggling under a high debt and interest burden. Well, TelecomAsia has the same problems,'' Mr Neapole said.

Indeed, AIS, which accounts for over half of the total market capitalisation for the telecom sector, has seen a steady erosion in its total shareholder returns over the past few years. While on a 10-year basis, returns stand at 23%, this falls to 12% for five-years and just 4% over three-years.

``There's been a steady levelling off in share price performance. How much is this from the investment community realising that the firm's dominant position is being continuously eroded,'' Mr Neapole asked rhetorically.

Mr Apte agreed. ``When margins decline, it is reflected in the forward share price. This is a case of investors looking down the road to the future.''

Banking, accounting for over 27% of total market capitalisation, showed a more mixed picture. The one-year sector return stood at just 4.7%, although this was heavily affected by sector giant Krung Thai Bank's -7% return, dragging down the group.

Mr Neapole noted that the top-tier banks _ Bangkok Bank, Thai Farmers Bank and Siam Commercial Bank _ all posted total shareholder returns of over 40% on a one-year basis.

``When you talk to people about the banking sector, it's these three banks that come to mind. These banks are the ones thinking of retail strategy, about product development and cross-selling,'' he said.

``These are the ones which are consistently being mentioned by investors, as proactive in trying to build a position for themselves in the future.''

Mr Apte said agriculture was one sector which had been a steady performer over the past few years, reflecting one of the core strengths of the Thai economy.

``When you think of Thailand, you think of agriculture. It doesn't necessarily appear in the top-five performers, but the sector has delivered consistently for investors,'' he said.

``It reflects agriculture's role as a fundamental driver of the economy. In rice, in sugar, Thailand performs very well, on a globally competitive scale.''

But executives who see their share price fall as part of a sector sell-off fail to understand that there are concrete steps which can be taken to manage investor expectations. While an economic downturn does affect everyone, a successful strategy can ensure that the impact is less relative to investors.

``It's very important to be proactive in managing your share price. That means reaching out to the investor community,'' Mr Apte said.

``Not retail investors. Retail investors don't drive your long-term share price. It's the lead or `steer' analysts, the fund managers, whom you need to reach. You need to manage the perceptions they have of your strategy, or of your quarterly results.''

Mr Neapole agreed. ``Some companies, when bad news hits, tend to close their doors. But you can argue that that's the time when you need to go out and talk to people.''

He paused. ``Markets tend to discount shares in the absence of information. Without information, people tend to turn conservative. Getting your story out on the street is critical.''

But the roots of many listed firms as family-owned businesses have made the concept of active investor management slow to catch on in the local market.

``Many really don't care about capital gains. They are happy to take their dividends, and so they ask, `Why spend money on managing the share price?''' Mr Apte said.

Yet putting into place the mechanisms and systems to track the drivers of shareholder value remains a critical need for many Thai and Asian firms if they are to step up in the global arena.

``For many firms, management remain unaware of what it is that drives their shareholder value,'' Mr Apte said.

``This isn't just information technology systems. It's more on what information to collect, what to present. Only now are some companies beginning to be aware of this.''

Mr Neapole echoed the sentiments. ``Many companies are not as aware as they could be about what investors want. It's not just sales and profit figures, or earnings-per-share figures, but much much more.''

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