Most EPS forecasts revised downward

Most EPS forecasts revised downward

We have cut our earnings per share (EPS) forecasts for 2019 and 2020 after the Stock Exchange of Thailand reported second-quarter EPS of 20.53 baht, well below our expectations of 23.30 baht, as well as a string of earnings downgrades for stocks under (and outside) Tisco's coverage.

As a result, we have reduced our full-year target for the SET by 4.6% to 100 baht and cut our 2020 target by 4.4% to 114.70 baht. Key changes to our forecasts are driven by:

Lower energy and petrochemical contribution. We have revised down the contribution from the Energy and Petrochemical subsector for 2019 by 2.8% to 27%. The revision is based on a Bloomberg consensus estimate for non-covered stocks, and the assumption that the world crude oil price will remain flat at US$59.97 a barrel, which should result in inventory losses in the third quarter of 2019 for Tisco-covered stocks.

Banks too. We have trimmed our SET Banking EPS forecast by 4.6% for 2019 and 15.5% for 2020 in line with the recent earnings downgrade for stocks under Tisco coverage.

Higher telecom contribution. We have revised down the SET Communications EPS contribution for 2019 by 3.3% to account for our recent earnings estimate revision of telecom stocks under Tisco coverage. We have raised our 2020 EPS forecast for the sector by 13.6% to account for gains from the JASIF asset sale (about 10 billion baht).

Analysts continue to aggressively cut earnings forecasts for the SET, with a consensus EPS at 99 baht for 2019 and 210 baht for 2020 (well below our projections). The worst revisions have been in Energy (down 19.3%) and Petrochemicals (down 40%) -- both of which were responsible for dragging down the overall index EPS.

Reversing this trend are Communications/Telecoms, Food and Property, which have seen earnings rise by 1.8% to 5.1%. Provided that crude oil prices remain steady at current levels, the overall SET EPS should start to stabilise. But the damage has been done in terms of the outlook, with the overall EPS forecast revised down 13.6% for 2019 and 11% for 2020.

Despite this, we expect local liquidity to keep the index at an elevated level. Even when foreign investors began selling aggressively, which led the index to dip from its 1,740 peak in mid-July to 1,604 by mid-August, the market still rebounded on heavy local institutional buying.

With the index still well below this year's high, we think this trend should continue. While we acknowledge that the SET price/earnings ratio (P/E) could become overextended if the rebound lacks fundamental support (in fact, the SET forward P/E and P/B is already above the historical average, according to a Bloomberg consensus), we note that when compared with early 2018 when the SET peaked, its current valuation is still below those levels.

Furthermore, we believe that forecasts of earnings reductions for the broad market in 2020 are overdone (our 2020 SET EPS forecast is 3.6% higher). In sum, we expect P/E expansion to partly offset reduced estimates, though 2020 could be harder because of a temporary liquidity shortage arising from the expiry of long-term equity funds and the creation of a new fund regime.


We have removed ROBINS (which outperformed the SET after the share conversion announcement) and CK in favour of a tourism-related theme. We have added AOT to the list of our top picks. We believe that tourism bottomed out in June and July, and a combination of a low-base effect in 2018, currency stabilisation and hotel price cuts will put the country on track for double-digit arrival growth.

We are less optimistic about contractors, as we expect that the bulk of the government's effort in 2020 will be on boosting domestic consumption and tourism arrivals. Our top picks now consist of transport/tourism, consumption, banks and telecoms: AOT, PLANB, BJC, CPALL, BBL, SCB, KTC, KKP, INTUCH, TRUE and S.

The key downside to the SET EPS target continues to be crude oil prices. For the time being, we see limited downside risks because of a number of factors. These include the startup of new refineries in China, a Fed rate cut that should keep the dollar relatively weak, and renewed optimism about US-China trade negotiations. Consequently, world crude prices should remain at current levels ($60 a barrel for Brent) despite a weak global demand outlook and new supply from the Permian basin in the US.

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