Confidence in earnings still subdued

Confidence in earnings still subdued

Earnings plays for the second quarter of 2019 were still concentrated in a few medium-sized sectors on the Stock Exchange of Thailand. Aggregate growth is still weak, declining more than 10% year-on-year in both core and net profit. The third quarter may see a shallower year-on-year decline, but confidence in earnings remains subdued.

An anticipated economic stimulus package from the new government would help only a few sectors that would benefit from higher spending power. But weaker global growth in the second half, uncertainty over the US-China trade conflict, less-aggressive rate cuts by the Fed and higher tension in the Middle East are among the risk factors that could depress the market from its currently high valuations.

SET-listed firms that have not reported already will be announcing their second-quarter results over the next three weeks; many will also announce first-half dividends. An expected interest-rate reduction by the US Federal Reserve, possibly at the end of this month, and the current low bond yield environment are keeping the gap between the mean SET dividend yield and the three-year Thai government bond at a moderately attractive level of 1.36%. That is slightly above the three-year mean of 1.31% (it has ranged between 0.6% and 1.8% during that time). But signals of a shallower Fed rate cut could drive bond yields higher and make dividend picks less compelling at current valuations.

For the second quarter, the SET bottom line is likely to drop 17% year-on-year and 18% quarter-to-quarter. The expected year-on-year dive largely reflects weaker core operations, inventory losses for the Oil and Petrochemical sectors, and extra employee benefit expenses under the new labour law.

As for core earnings, we estimate a decrease of 13% year-on-year and 6% quarter-to-quarter. The sectors that appear to be the best performers in year-on-year core growth are Food (improved pork prices and higher restaurant sales), Finance (healthy loan growth), Insurance (led largely by TQM), Industrial Estates (higher land transfers and income from power business) and Tourism (mainly from MINT).

Dividend plays: Of the stocks under Bualuang Securities' coverage, only 15 are likely to pay interim dividend yields of at least 2%. Of these 15 stocks, only three offer an interim dividend yield of at least 3%. Property, Automotive, ICT and Food are among the most attractive interim dividend plays.

Some 60% of the companies under our coverage pay interim dividends. The payout for the first half of the year is normally lower than the payout for the second half. We assume a payout of 37% of net profit for first-half operations versus 49% for the full year.

Among the stocks under BLS coverage that pay interim dividends, 43% should be able to pay higher year-on-year dividends for the first half. The aggregate dividend for the first half may decline 20% year-on-year, versus an expected earnings contraction of 15%.

Decline narrows in Q3: Our preliminary outlook for third-quarter SET core and net profit is for declines of 4% and 5% year-on-year, respectively. The bottom-line decline is due largely to lower oil and petrochemical product prices. Sectors poised to post the best year-on-year core and net earnings expansion are Finance (strong year-on-year loan growth, contained loan-loss provisions), Industrial Estates (higher land transfers), Tourism (MINT's operations in Europe still drive most of the year-on-year growth), Media (expected recovery in ad spending after the formation of the government) and Food (higher meat prices year-on-year).

Earnings cuts continue: Downward revisions of earnings forecasts are continuing in July after a 9% cut in the first half of 2019. Oil and Petrochemicals, Electronic Components and Tourism are among the sectors with reduced forecasts after downgraded global GDP growth and the stronger baht.

Generally weaker macro developments, global and Thailand-specific, could exert more downside pressure on estimated earnings. Our current full-year earnings per share assumption is 105, which is in line with the street's number of 105.1.

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