Please be advised that February 13th, 2017 is our public holiday (Substitution for Makha Bucha Day). Consequently, The Stock Exchange of Thailand (SET), The Market for Alternative Investment (MAI), The Thailand Futures Exchange (TFEX) and KT Zmico Securities Co.,Ltd. will be closed on this coming Monday.
Our UNDERPERFORM rating reflects the stable operating performance outlook for TTW, which will keep its share price trading in a narrow range. Its yield of 5% will be secured by strong operating cash flow as the catalyst.
4Q16 earnings below view
TTW reported a net profit of Bt568mn (EPS: Bt0.14) in 4Q16, decreasing 8.4%YoY and 11.7%QoQ. This was below the market consensus by 7% due to the unexpected shared loss from CKP, which reversed to a net loss of Bt177mn in 4Q16, largely blamed on a one-off Bt378mn write-off expense linked to Nam Bak.
Flattish core operation in 4Q16
Stripping out shared profit from its associate, core NP increased 6%YoY (flat QoQ) to Bt613mn. This was attributed to GPM expansion to 73.6% from 71.8% in 4Q15 and 71.3% in 3Q16 thanks to effective production cost control. Its SG&A to sales also dropped to 4.6% from 5.7% last year. Loan repayments together with a declining average cost of debt reduced interest expenses by 32%YoY and 9%QoQ.
2016 NP fell 8%YoY
For 2016, TTW delivered a net profit of Bt2.48bn, falling 7.6%YoY, mainly due to the negative effect from effective tax rate normalization. If excluding this, its EBT remained flat YoY at Bt3.1bn. Its revenue fell 1%YoY on the combination of lower sales volume (-0.5%YoY) and selling prices, which were linked to the negative Consumer Price Index (CPI) of 2015. The flat GPM together with declining SG&A to sales were offset by lower shared profit from CKP, which retreated 86.5%YoY to Bt14mn.
DPS of Bt0.30, goes XD on March 13
TTW announced to pay a DPS of Bt0.30 for its 2H16 operating performance. This represents a 2.8% yield for the period. The XD sign will be posted on March 13, with the payment to be made on May 4, 2017.
Earnings forecasts maintained
We reiterate our view on the slow recovery of tap water sales (approximately 1-2%). Our 2017E-2018E earnings estimates are maintained.
Outlook: The SET Index is expected to weaken, with the support of 1,546/1,530 points. We do not expect foreign capital inflows in the near future while the market remains under external pressure, e.g., election calendars in Europe that have triggered concerns that some countries will follow England into an exit from the EU. For instance, the general election in the Netherland is scheduled for 15 Mar-17 and the Party for Freedom (PVV), i.e., the right-wing party that seems keen on an EU exit, is leading its rivals. In France, the first round of presidential elections will take place in Apr-17. Meanwhile, in the US, it is worth highlighting the Fed meeting results. Meanwhile, Trump’s economic and international trade policies will remain a focus.
Domestically, the internal factors may include profit taking activities post earnings reason as well as scheduled XDs. Some technical selling can be expected if the index falls below the major support of 1,546 points. Meanwhile, the support from window dressing in late March may be rather limited.
Recommended Stocks: Recommended stocks include those with huge upside or with short-term positive factors, e.g., ASEFA, BANPU, CPALL, EPG, KTC, PTTGC, SPCG, TMT, TTA and WHA.
March Statistics: Based on ten-year historical data (2007-2016), there was a 60% possibility that the SET Index in the month of February would close positive, with an average return of +2.0%MoM, a maximum return of +9.2%MoM (in 2010) and a minimum return of -3.4% MoM (in 2008). The returns also continued to increase in the months of April and May at the averages of +3.0%MoM and 0.6%MoM, respectively.
Fund Flow: The ten-year historical data for the month of March (2007 – 2016) also shows that foreign investors net bought at an average of +Bt14.1bn and continued to net buy at +Bt3.3bn in April before turning to net sell at -Bt9.1bn in May.
Catalysts: i) revisions to earnings and target prices; ii) continued recovery of the Thai economy; iii more stable oil price; and iv) window dressing.
Concerns:i) Fed meeting (keep a close watch on the rate hike); ii) XDs; iii) European politics (e.g., election in the Netherlands) and iv) Trump’s foreign policy.
Please be advised that April 13th-14th, 2017 is our public holiday (Songkran Festival). Consequently, The Stock Exchange of Thailand (SET), The Market for Alternative Investment (MAI), The Thailand Futures Exchange (TFEX) and KT Zmico Securities Co., Ltd will be closed on this coming , Thursday and Friday .
TTW: Weak earnings outlook – Underperform (TP Bt11.20)
Earnings estimates cut with new TP of Bt11.20
TTW’s 1Q17E earnings are likely to decline YoY dragged down by weak tap water sales and CKP’s poor performance. This leads us to cut its 2017E-2018E earnings forecasts by 2.7% and 3.3%, respectively. Although the current price has limited upside to our new sum-of-the-parts valuation of Bt11.20 (down from Bt11.40), the attractive yield of 5% causes us to maintain our UNDERPERFORM rating.
Group’s water dispatch remained weak
The TTW Group’s tap water sales volume continued to soften to 90.5mn cubic meters (cu.m.) in 4M17, decreasing 1.8%YoY. Weak demand was seen at both TTW (-2.2%YoY) and PTW (-1.7%YoY). The weaker-than-expected 4M17 sales volume leads us to trim our full-year growth forecast to -0.4%YoY, from +0.4%YoY previously. Our growth forecasts for 2018E-2019E are also revised down to 0.8%YoY and 1.2%YoY, respectively.
2017E-2018E earnings estimates cut
Our 2017E-2018E earnings estimates are revised down by 2.7% and 3.3%, respectively. In addition to the downward revision of tap water sales volume, our model is also adjusted in line with our recent earnings downgrade on CKP. The lower-than-expected power generation of Nam Ngum 2 in 4M17 (-19%YoY to 538GWh) led us to cut CKP’s 2017E-2018E earnings forecasts by 43% to Bt250mn and 24% to Bt379mn, respectively.
Slow earnings in 1Q17E
We expect TTW to post a net profit of Bt595mn (EPS: Bt0.15) in 1Q17E, down 4%YoY. This is mainly attributed to a slow recovery in the tap water business and a shared loss from CKP. Earnings from tap water should increase by 2%YoY on the back of efficient cost control and a lower interest burden. Its revenue should be flat YoY, as weak sales volume (-1.8%YoY to 67.6mn cu.m.) should be offset by a higher tariff. Its core earnings should also be hurt by CKP’s results. We estimate CKP to mark a loss of Bt97mn in 1Q17E, largely due to the poor performance of Nam Ngum 2 and BIC1 (maintenance shutdown in Jan-17). As a result, TTW would share a loss from CKP of Bt25mn, reversing from shared profit of Bt12mn in 1Q16. On a QoQ basis, its earnings should gain 5% on slight improvement in the tap water business together with a narrower shared loss from CKP.
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Rental cost negotiations continue with expected mutual benefit
AOT believes the negotiations with the Treasury Department regarding new rental costs should be mutually beneficial. The rental contract may be terminated if the cost increase makes the project unfeasible. Nevertheless, we believe this issue will still be a negative catalyst for AOT and maintain an “Underperform” rating, with the TP rolled over to FY18E at Bt47. Every Bt1bn rental cost increase will lower our FY17E net profit projection and TP for AOT by 3% and 1%, respectively.
Revise up passenger volume growth in FY17-18E to 8% for each year
AOT’s passenger volume in May-17 (preliminary figures) grew by 5.8% YoY; +7.3% for international and +4.0% YoY for domestic. YTD (fiscal year), passenger volume grew by 7.2%, vs. AOT’s own target of +7.0% YoY for the whole year. However, with the low-base impact from the crackdown on illegal tour operators in 2HFY16, we believe passenger volume in 2HFY17E will likely accelerate. As a result, we decide to revise up passenger volume growth in FY17-18E to +8% p.a., vs. +7% previously.
Custom Free Zone operation to add revenue of ~Bt500mn in FY18E
Last year, AOT terminated the Custom Free Zone concession contract with the previous operator and turn back to its own operation. AOT expects to increase this revenue by Bt500mn in FY18E due to more efficient management. Meanwhile, AOT expects to increase new business from this operation in the future, especially related to e-commerce, etc.
Bidding for new duty free operator to start by yearend
AOT insists that the concession contracts with King Power to operate duty free at SBIA, which will expire in Sep-20, are legal and accountable, including the Point of Sale (POS) system. The tendering process for seeking a new operator of the duty free will likely start by late this year or early next year. The operator for the new terminal (Phase II expansion) will likely be chosen at the same time.
Slightly lower earnings projections in FY17E, FY18-19E maintained
We slightly lower norm. profit in FY17E by 3% to Bt22.1bn, vs. Bt22.7bn previously, owing to: 1) a lower revenue projection by 2% to Bt55.1bn due to lower average PSC (due to a higher portion of domestic passengers) and lower flight movement growth to +5%, vs. +8% previously, and 2) an upward revision to operating costs by 1.7% due partly to a rental cost increase for regional airports. However, we maintain our norm. profit projections in FY18-19E as the upward revision of passenger volume growth and additional revenue from the Custom Free Zone will likely offset the cost increase.
2018E year-end SET target at 1,720 points
We rolled over our SET target to 2018E yearend at 1,720 points, based on a bottom-up approach with a discount of 3.5% (equivalent to 15.6x PER over the 2018E EPS estimate). This base-case SET target assumes that a general election will take place next year. In the meantime, we have also changed our view toward the Thai equity market to “Slightly Positive” from “Slightly Negative” previously.
Foreign fund flows to continue driving the Thai equity market
Former Prime Minister Yingluck Shinawatra’s fleeing from the kingdom has triggered changes in Thailand’s political path. The implication of her absence is that the political tension in Thailand for the remainder of this year through next year is expected to ease. The current situation may have an impact on the level of popularity of the Pheu Thai Party in the next general election.
Furthermore, external shock buffers in Thailand are relatively better than those seen in EM counterparts. This implies that Thailand is an attractive short-term investment destination amid uncertainty in global financial markets, especially regarding growing tension in the Korean Peninsula and concerns over U.S. politics.
Second-half GDP growth this year forecast at 3.7%
We expect to see a brighter outlook for the Thai economy in the second half, 3.7% in 2H17F vs. 3.5% in 1H17. Key drivers are anticipated stronger demand, in particular merchandise exports, and to a lesser degree, private consumption and investment. Meanwhile, the monetary policy stance remains accommodative as the Bank of Thailand is likely to keep its policy rate steady at 1.50% for the next several months.
Expect just modest growth in SET-listed firms’ earnings
The earnings revisions this year look slightly weak due in part to relatively weaker earnings growth in domestic economy-linked sectors, e.g., banks, and weaker earnings in the ICT sector where competition has intensified. We project the market’s EPS growth at 7.2% for this year and 9.9% for 2018E.
Given our upbeat view toward fund flows, we employed a top-down approach to select our top-pick stocks. We particularly focus on stocks included in the MSCI Thailand Index, including PTT, IRPC, BANPU, PTTGC, SCC, EGCO, SCB and BBL. Meanwhile, in a bottom-up approach, we favor earnings plays, i.e., stocks demonstrating outstanding net profit growth during 2H17-18E, including IRPC, GUNKUL, TPCH, SC, BJC, MTLS, STEC and MINT.
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December 11th, 2017 is our public holiday (Substitution for Constitution Day). Consequently, The Stock Exchange of Thailand (SET), The Market for Alternative Investment (MAI) ＆ The Thailand Futures Exchange (TFEX) will be closed on this coming Monday.
Please be advised that July 27, 2018 and July 30, 2018 are our public holiday (Asarnha Bucha Holiday and Substitution for H.M. the King's Birthday Anniversary). Consequently, the Stock Exchange of Thailand (SET), the Market for Alternative Investment (MAI) and the Thailand Futures Exchange (TFEX) will close on this coming Friday and Monday.
Please be informed that April 15 - 16, 2019 is our public holiday (Songkran Festival). Consequently, The Stock Exchange of Thailand (SET), The Market for Alternative Investment (MAI), ＆ The Thailand Futures Exchange (TFEX) will close on this coming, Monday and Tuesday.
The quarterly review for May remains mostly the same but with the following weighting increases:
1. The weighting of China A-shares has been increased in the MSCI EM Index to +1.76%. The increase will be implemented in three steps: the FIF was increased in the May review to 0.1 vs. 0.05, and it will be increased further to 0.2 in the review in November 2019.
2. Saudi Arabia (MSCI implemented the first of two steps in this review, with its total weighting in the MSCI EM Index increasing to 1.42%).
3. Argentina (implemented in one step, with a weighting of 0.26% in the MSCI EM Index).
Thai equities: The Thai stocks newly added to the MSCI Global Index are INTUCH, RATCH and DTAC, while DELTA has been removed.
MSCI Small Cap Index: AEONTS, AAV, BLA, EASTW, PSH and TASCO have been added, while MC, PRINC, THCOM, TFG, VGI and VIBHA have been removed.
Other stocks with a higher weighting are SCC, BDMS, CPN, BBL, LH, EGCO, CPALL and TU, while SCB had its weighting reduced.
The review will become effective from May 28, 2019, onward.