Firm ground but rough road ahead

Returns of finance stocks likely to remain flat this year as clouds of war hang low

The finance and securities sector was a steady performer throughout 2002, with many firms reporting higher revenues, as investor activity on the Stock Exchange of Thailand picked up and finance firms enjoyed healthy returns on the back of a consumer spending boom.

Total shareholder returns over 2002 for the finance sector stood at 28.13%, well above the overall market average of 17.3%.

But analysts caution that 2003 is likely to be a volatile year for many stocks, given the increased competition in the market and investor uncertainties over a US-Iraq war.

Looking closer at the numbers for 2002 shows a broad variance in returns, with the top-performers being Siam Panich Leasing at 88.19% returns for the year and MFC Asset Management 89.66%. In contrast, Nava Leasing had a negative TSR at -47.68%, Siam General Factoring at -33.03 and Adkinson Securities -31.8%.

Philip Gawsawadikul, an analyst at Asset Plus Securities, said the finance and securities sector was likely to offer investors attractive returns this year, ``for people willing to take up risk''.

Volatility over the short-term was expected to dominate, he said, given that turnover in the share market was likely to be flat through the first half due to war fears.

Any decline in trading turnover on the SET would directly affect the earnings of securities firms. Despite efforts to boost advisory and underwriting services to supplement their fee-based income, the majority remain dependent on trading commissions for the bulk of their revenues.

The fixing of minimum commissions and the generally bullish mood of the markets were key factors boosting overall 2002 earnings for securities firms. Daily turnover on the exchange last year averaged 8.35 billion baht, compared with 6.4 billion baht in 2001. For January, turnover averaged just 6.8 billion baht per day.

Most analysts expect daily turnover on the SET this year to stand at around eight billion baht, with activity picking up in the second half of the year.

``The sector and overall market are exposed to external risks, led by prospects of a Middle East war. But if our projections are correct, returns for the sector in the second half would be quite attractive,'' according to Mr Philip.

Uncertainties over a potential war has hurt short-term returns for many sector stocks. Siam Panich Leasing, for instance, has seen its share price decline by nearly a quarter over the past two months.

But Shatchawan Kiatgraigangwan, SPL president, said any Middle East war was unlikely to affect domestic consumption or the leasing market.

Small-and-medium companies were continuing to expand despite external volatility, he said, which in turn would support continued growth for the year.

Mr Shatchawan said SPL offered investors good liquidity, high growth and strong financial performance, adding that the firm paid an interim dividend of 0.75 baht per share last year and would pay another baht per share for the full year performance in April.

SPL reported 2002 profits of 775.16 million baht, up from 673.9 million the year before. Earnings per share in 2002 was 3.89 baht, compared with 3.39 baht in 2001.

According to Mr Philip, SPL's strategy of focusing on the used-car market would help boost margins in hire-purchase lending and support growth later in the year.

``The new car market, although continuing to post sales growth, is coming under heavy competition and will show lower profit margins,'' he said, adding that hire-purchase firms would be more ``interesting'' for investors in the sector than brokerage, finance or consumer lending stocks.

According to SPL, margins for used-car lending stand at around 10%, or double the margins for hire-purchase loans for new car purchases.

Among finance companies and brokers, top performers in terms of TSR for 2002 included National Finance at 40.74%, Tisco at 38.27% and Kiatnakin at 48.2%, all firms with diversified revenue streams covering both securities brokerage services, lending and investment banking advisory arms.

Among pure brokerage plays, United Securities posted a 30.69% one-year return, Capital Nomura 25.7% and ABN Amro Asia Securities 21.7%. The firms well below the sector average were Book Club at -17.69%, KGI Securities at -0.5% and Ayudhya Investment and Trust at -1.69%.

Firms that possess strong investment banking operations would likely outperform their peers as more companies return to the exchange to raise capital through new listings or public offerings.

Finance firms are also expected to post only moderate gains, despite the favourable low rate environment.

Demand for new loans remains slight overall, analysts said, with those firms borrowing for new investment or business expansion limited to only a few consumer-focused sectors.

Consumer finance companies, such as Aeon Thana Sinsap, were expected to post continued growth in 2003 despite new regulatory controls on interest rates and fees.

Mr Philip said while short-term sentiment would be overshadowed by the new controls, growth overall for consumer finance should remain robust as the economy continues to expand, favouring companies such as Aeon or newcomer Krungthai Card.

``In any case, investors looking for stable returns and dividend earnings should consider other sectors outside of finance and securities, given the volatility of share prices in the sector overall,'' Mr Philip added.

_ Darana Chudasri

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