Brief Thailand: Asian Credit Monitor: The Pad Thai Election and more

In this briefing:

1. Asian Credit Monitor: The Pad Thai Election
2. SPCG: Laying Foundations for Next Stage of Growth
3. S: Outshines Thai Property Peers on High Recurring Profit
4. Starboard Value. The Game Changing Activist Investor That Doesn’t Take No For An Answer.
5. Thai Telecoms: Slowdown in Mobile Business Continues.

1. Asian Credit Monitor: The Pad Thai Election

We expect the upcoming March 24^th general election in Thailand to be the first step toward a check-and-balance system but also see this election leading to another election in 2-3 years with the current poll pointing to either an indecisive faction with the junta’s leader, General Prayut Chan O-Sha as the Prime Minister (PM) or  a loose faction with Abhisit Vejjajiva as the PM. In either case, we do not expect the new government to have the decisive vote in the parliament. 

With all the campaign promises, most of which copied Thaksin’s populism style, we also expect rising domestic spending post-election. We expect the voting turnout to be a record 80% or above and believe this election is at least a step toward a more transparent government with a valid opposition and that should induce more investments into the country. That said, we see the event as credit positive for Thailand. Though Thailand’s USD and THB bonds are not attractive and/or sufficiently liquid to international investors, in our view, we believe Thailand is worth monitoring on its role to be the center of the Greater Mekong region, let alone ASEAN.

2. SPCG: Laying Foundations for Next Stage of Growth

We initiate coverage of SPCG with a BUY rating and a 2019E target price of Bt22.80, derived from a discounted cash flow valuation (WACC 7.0% and terminal growth of 1.0%). This is equivalent to 8.4x PE’19E.

The story:

• Promising industry outlook
• Striding toward overseas opportunities
• Expiring adder should have been priced in already
• Expected stable earnings in 2019-21E

Risks:   Single source supplier

                Forex fluctuation

                Uncertainty about sunlight

3. S: Outshines Thai Property Peers on High Recurring Profit

We initiate coverage of S with a BUY rating, based on a target price of Bt4.2 derived from a sum-of-the-parts (SOTP) methodology and implying 16.5xPE’19E, a 23% discount to the average of its peers in the Thai real estate sector.

The story:

• Asset value to drive long-term sustainable growth
• 19 projects under development worth a combined Bt36bn to drive sales over the next three years
• REITs will be a key catalyst to boost recurring income
• Higher revenue contribution from hotel business

Risks:

• Tightened credit approval
• Raw material costs & F/X fluctuation

Background: In 2014, Santi Bhirombhakdi** and his property arm, Singha Property Management, acquired a major stake in RASA, a listed property company on the SET, and changed its name to “Singha Estate Public Company Limited”,  or “S”. This new major shareholder quickly unveiled plans to transform S into a holding company. During 2015-17, the company made several acquisitions including (1) a 51.56% stake in NVD, a low-rise property developer that operates under the “Nirvana” brand with a current market value of Bt2.7bn; (2) Suntowers, an office complex worth Bt4.5bn; and (3) a mixed-use commercial complex owned by the major holder’s family business worth over Bt6bn. It also set up a joint venture with a partner to invest in and operate 26 hotels in the UK worth Bt8.6bn.

Revenue breakdown:

The residential property segment contributed 41% of S’s 2018 total revenue. This segment includes the development and sale of high-rise and-low rise projects such as single detached houses, townhomes, home offices, and condominiums.

The commercial property segment contributed 36% of total revenue. This business includes space for rent, common-service charges for utilities, security systems, and other service fees. The company owns two commercial property projects — The Lighthouse (a community mall) and Suntowers (an office complex).

S owns 37 hotels with a combined 4,271 rooms comprising (1) two hotels with 297 rooms in Thailand, namely Santiburi Beach Resort & Spa and Phi Phi Island Village Beach Resort; (2) 22 hotels in England and 7 in Scotland (total of 3,115 rooms) under a 50:50 JV with FICO Group; and (3) 6 Outrigger-branded hotels with 859 rooms. This segment accounts for 18% of sales.

The company also provides construction materials such as precast concrete and aluminum, as well as hotel management services. These two segments contribute 3% and 2% respectively.

4. Starboard Value. The Game Changing Activist Investor That Doesn’t Take No For An Answer.

New York based activist investor firm Starboard Value has been intricately involved in shaping the  fortunes and futures of two high profile technology companies in recent years, Marvell and Mellanox. The firm first to prominence some five years ago when they were the first among their peers to accomplish the extraordinary feat of replacing the CEO and entire board of Fortune 500 restaurant group Darden, while holding less than 10% of the company’s shares.

In the wake of their Darden coup, the firm has gone from strength to strength. To date the firm has taken positions in a total of 105 publicly listed companies, replacing or adding some 211 directors on over 60 corporate boards.

On March 7’th 2019, Starboard Value announced the acquisition of a 4% stake in US comms infrastructure firm Zayo. In the intervening period, Zayo’s share price has risen by 14% as canny investors scramble to partake in the goodness that will surely be extracted by the activist firm that simply doesn’t take no for an answer. 

5. Thai Telecoms: Slowdown in Mobile Business Continues.

The Thai mobile market reported another weak quarter in 4Q18, with trends deteriorating at all three operators. The weakness was partly due to the cheap unlimited fixed speed offers which were popular in 2018 but which have now been removed from the market. Growth should recover by 2H19.  With Total Access Communication (DTAC TB) having acquired spectrum in 2018, it will no longer cede market share without a struggle. That suggests competitive risks are high in Thailand, with all three operators aiming to boost market share. We remain cautious on the sector and are also worried that the government seems keen to push on with 5G spectrum auctions despite a lack of use cases.