It's about expectations

Companies must understand what drives value for them and communicate their strategy

CHIRATAS NIVATPUMIN

Economists generally look at stock markets as a leading indicator for economic trends, as share prices are driven by investor expectations of corporate performance and profits.

For 2002, the Stock Exchange of Thailand was no exception to the rule, as the broad index rose by more than 17%, one of the top performing markets in the world. Thailand's overall economic performance, with growth estimated at 5%, was also well above most analysts' expectations.

Driving the overall gains in the SET were consumer-led sectors, namely building and furnishing and the property sector, both beneficiaries of strong state support and the low interest rate environment.

On the other side, two sectors _ banking and communications _ continued to disappoint, albeit for different reasons.

While the banking sector can blame its poor performance of -13.3% total shareholder returns on giant Krung Thai Bank, the woes in the telecom sector generally reflect global trends, with the IT sector stalled for years.

For any investor, calculating returns is a simple enough proposition, comprised of returns from dividends plus capital gains. While dividends reflect corporate profitability, share prices are more a reflection of market expectations of future company prospects.

The Shareholder Scorecard, prepared by L.E.K. Consulting and the Bangkok Post, aims to help investors pick winners by comparing total shareholder returns for each company listed on the SET, based on price and dividend data as of the end of 2002. Performance is considered on a one-year to 10-year perspective, so investors can identify those firms who have consistently delivered value in the long-run.

J. Sharad Apte, a director of L.E.K.'s Bangkok office, said the SET in 2002 performed quite well overall, with certain key sectors doing extraordinarily well.

Indeed, if the banking and communications stocks were stripped out, total shareholder returns for the year for the SET were 42.5% for 2002, 5.8% on a three-year basis and 8.5% on a five-year basis.

This compares with the one-year TSR for the entire market of 17.3%, a three-year return of -9.2% and a five-year return of 2.6%.

But Mr Apte said it was difficult for investors to ignore either the banking or telecom sectors, given their huge market weights and key roles as engines for the economy.

``Yet if you look at the banking sector, it's a tale of two groups. On one hand, you have the larger banks performing well, such as Bangkok Bank, Thai Farmers Bank, Siam Commercial Bank and Bank of Ayudhya,'' he said.

``And then you have the state-owned banks, which have historically been poor performers overall.''

Bob Neapole, another director in L.E.K.'s Bangkok office, said the majority of market sectors had posted double-digit returns over a one-, three- and five-year horizon.

``If you look at the SET, you see three tiers, all evenly divided in terms of market capitalisation. One one hand, you have the banking and telecom sectors, structural engines of the economy, which did terribly,'' he said.

``You have another group that posted steady, solid returns. This includes property, building and furnishings, and energy. And then you have a whole swath of smaller sectors that have generally done very very well.''The fact that the 10 largest companies in the SET represented around half of its total market capitalisation only reinforced the reality that the market was really geared toward retail investors.

``From the retail perspective, the SET has posted very attractive returns. But for institutional investors, it's been more difficult, because there are so few players,'' Mr Neapole said.

``For foreign funds, there might be fewer than five companies on the SET that will be tracked regularly.''

But Mr Apte said that in general, performance should be geared toward attracting institutional investors.

Achieving this meant understanding the key value drivers for the firm's performance and cash flow, establishing a coherent strategic vision and plan that is readily communicated to the markets and taking the steps to improve overall efficiency.

``It's a misnomer that telecom firms on the SET are competing with energy firms, for instance. For institutional investors, Thai telecom companies are actually competing with other regional telecom operators,'' Mr Apte said.

All too often, companies saw their share prices underperform because markets did not understand their strategy or management had failed to recognise what factors were driving performance.

``You see a lot of companies now looking to adopt key performance indicators (KPI). But we've noticed that in many cases, the KPIs are not linked to the real value drivers. It's almost like a fad. Companies need to understand what drives cash flow,'' Mr Apte said.

Mr Neapole agreed, adding that companies needed to first understand market expectations in terms of performance and strategy, and then begin the task of drafting strategies to close those expectations.

``All too often, companies take strategies that are based on an accounting foundation, where you are looking at past performance,'' he said.

``This is in contrast to taking a strategic approach, where your focus is on building future cash flows and thus shareholder value.''

Communication with investors is also crucial, a fact increasingly recognised by Thai firms. Dozens have improved their ties to investors by establishing investor relations departments and meeting regularly with fund managers and analysts.

In some cases where sector sentiment is moving strongly in one direction, companies can take steps to break out from the herd by outlining clear goals and strategies for investors.

Telecom firms, for instance, have seen their share prices hammered largely because of the global retreat from the sector. Investors have also grown wary about regulatory uncertainties and rising competition made inevitable as the market liberalises.

Here, firms who believe their share price hardly reflects their actual prospects can take pro-active measures to meet market expectations by outline their plans under different future scenarios to investors. ``You need to explain to investors about what the possible outcomes are from policy changes, what the scenarios are, the opportunities and the threats,'' Mr Neapole said.

``If investors don't know, generally they look to discount. To the extent that a company can provide information to the markets, it's helpful.''

Mr Apte noted that worldwide, more companies were recognising that dividends were a key driver of share performance.

``Actually, many Thai firms have historically paid strong dividends. It's something that goes back to the structure of many Thai firms, where as family companies, wealth was generated from dividends,'' he said.Improved shareholder returns for many Thai firms not only reflected the overall improved sentiment about the economy and corporate profit outlook, but also the considerable structural improvements made at many companies since the 1997 crisis.

``Take Siam Cement, for instance, which posted a one-year return of 155%. The company has downsized, it's refocused on its core operations, and now has seen a sharp gain in its total shareholder returns,'' Mr Apte said.

Notably, the overall return for the market last year closely mirrors the increase in the SET index, showing how investors have largely revalued prices in expectation of higher dividend returns.

According to the SET, out of 393 listed companies, 182 firms paid dividends for 2002. Notably, 163 firms had dividend yields of more than 3% and 105 companies with yields of over 7%.

From a valuation standpoint, the price-to-earnings ratio of the entire market in 2002 stood at 6.98 times, a sharp gain from 4.92 the previous year but still relatively cheap compared to other markets in the region.

``When we talk about sentiment, a lot of people think it's a fickle concept. But actually, it's all about future expectations,'' Mr Neapole said.

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