Awaiting a better Q4

Awaiting a better Q4

Second-quarter earnings disappointment reflects underperformance in telecoms and energy, but turnaround expected

Earnings on the Stock Exchange of Thailand in the second quarter of this year turned out to be a bit of a disappointment, with Bloomberg reporting earnings per share (EPS) at 25.95 baht for the broad index as of Aug 23.

Although earnings grew 15.2% year-on-year, the EPS figure was 5.6% below our estimate of 27.50 baht. The biggest disappointments were in the non-bank sectors -- with the worst being Utilities and Energy (thanks mainly to foreign-exchange losses), followed by Telecoms.

In terms of stocks that had the most impact on the earnings miss, we note that TRUE reported much lower-than-expected gain from an asset sale -- resulting in reported earnings of 10 billion baht versus a consensus estimate of 23.3 billion. This 13-billion-baht difference alone accounted for a large portion of our SET earnings estimate miss.

PTTEP also reported a significant earnings decline year-on-year which also contributed to the missed estimates. Nonetheless, we noted that positive surprises were concentrated in the bank sectors, and selected petrochemical, property and hotel stocks.

Looking at the biggest upsets in the quarter (TRUE and PTTEP), TRUE booked 55.2 billion baht from a second asset sale to Digital Telecommunications Infrastructure Find (DIF). But after deducting the asset cost (8.26 billion), expenses (877 million), reinvestment in DIF (13.83 billion), deferred tax expense (7.52 billion), DIF rental and impairment (14 billion), the company was left with a gain of just 10 billion baht. TRUE also cut its second-quarter depreciation charge by 950 million.

While the company did not include an impairment from handset subsidies in the quarter, its management indicated that it would do so again at the end of 2018 via retained earnings, in accordance with IFRS15 rules. This would lead to another round of depreciation reductions in the fourth quarter of 2018 and first quarter of 2019.

For PTTEP, second-quarter net income of 3.6 billion baht was down 73% quarter-to-quarter and 52% year-on-year. But we noted that core profit was 10.7 billion, up 11% quarter-to-quarter and 87% from a year earlier.

The quarterly improvement in core profit came from both improved volume and selling prices, while the year-on-year improvement was mainly from selling prices. The missed earnings, therefore, were mostly a reflection of the weakening baht, which has a substantial impact on PTTEP's bottom line.

Excluding TRUE, revenue for stocks under our coverage rose by 4.1% year-on-year on average. The outperformers were banks and energy and the underperformers were property and industrial estates.

On average, EBITDA (earnings before interest, tax, depreciation and amortisation) margins declined by 21.3 basis points quarter-to-quarter (the second quarter is the traditional low season for the majority of sectors) but were up by 30.6 bps year-on-year, which we believe reflected ongoing cost-reduction measures.

Telecoms firms generally saw some of the largest EBITDA margin gains year-on-year and quarter-to-quarter, while many property companies saw their margins contract due to limited revenue recognition and higher sales and administrative costs.

Looking ahead to third-quarter earnings, we see a mixture of tailwinds and headwinds. We expect crude oil prices to decline slightly in September due to global refinery shutdowns, potentially leading to inventory losses for some refinery and petrochemical companies. We also expect to see lower earnings contributions from telecoms owing to a lack of asset sales and weaker tourist arrival growth.

Nonetheless, we expect a more stable foreign-exchange environment (which should lead to quarter-to-quarter performance improvement from energy and utilities), and slight quarter-to-quarter improvement for banks and commerce.

Consequently, we forecast a third-quarter EPS for the market of 26 baht against 25.95 baht in the second quarter and 21.60 baht in the third quarter of 2017. Combined with our expectation of 28.50 baht a share in the fourth quarter, we still maintain a SET EPS of 109.50 baht for the year and a year-end SET target of 1,850 points.

Our top picks for the rest of 2018 continue to be heavily weighted towards domestic-facing sectors related to banks, consumption, or construction materials and contractors. These include BBL, KBANK, CPALL, BJC, CPF, LH, QH, PSH, SCC, CK, TRUE and INTUCH. Our sole non-domestic stock pick is IVL.

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