Brief Thailand: SNC: Downgrade to “HOLD” to Factor in Gloomy Outlook and more

In this briefing:

1. SNC: Downgrade to “HOLD” to Factor in Gloomy Outlook
2. Political Pit Stop (February): Candidate Rosters Out
3. Screening the Silkroad: Small-Mid Cap – Possible High-Risk Names: Q1 2019

1. SNC: Downgrade to “HOLD” to Factor in Gloomy Outlook

SNC’s 4Q18 net profit dropped 39%YoY to Bt72m, lowest in past five quarters.  

• The drop in sales to Bt1.288m (-19%YoY) and the rise in SG&A to sales from 6.6% in 4Q17 to 9.6% are major contributors to the drop in earnings.
• Overall, FY18 net profit was Bt431m (+6%YoY) despite 14% decrease in sales. The strong improvement in its 2018 earnings was due mainly to high restructuring costs in 2017.
• We maintain neutral view toward its 2019-20 outlook due to slow recovery in overall industry.

We cut our target price by 17% to Bt14 (9.6xPE’19E) and downgrade from “BUY” to “HOLD” for gloomy outlook. Despite limit upside, current share price is still cheap compared to historical trading and offer an attractive dividend yield (6.5% in 2019-20E).

2. Political Pit Stop (February): Candidate Rosters Out

With royal approval of the election date on March 24, we are finally in the last leg of the election race. Some key developments:

• Candidate roster: Each party is allowed to put up three PM candidates, and it’s no surprise that the three front-runners in the polls, Gen Prayuth (incumbent), Sudarat of the Thaksin faction, and Democrat leader Abhisit, are all there.
• Air pollution in spotlight. Arguably, the most successful campaign message so far has been the Thaksinite attack on the government’s poor handling of air pollution. Definitely get a few brownie points there.
• Different positioning. We observe clearer differences in the campaign positioning of each political parties. Given the negative mood in Thailand over pollution and the economy, it appears that Thaksinite focus on the government-related negatives is working best at the moment.’
• Economic backdrop. Economics can affect election results in Bangkok and in general, it is not favorable to the current government. We expect the Democrats to win easily in Bangkok, though a few seats will be ceded to the Thaksinites and Future Forward.

3. Screening the Silkroad: Small-Mid Cap – Possible High-Risk Names: Q1 2019

Increasing risk apparent

• Q4-2018 Small-Mid Cap High-Risk screen ( Screening the Silkroad: Small-Mid Cap – High-Risk Names To Avoid Q4 2018 ) delivered a market cap average share price decline of 4.5%. This compares with the MSCI Asia Pacific Index appreciating 4.2% over the same period. 
• Our screen looks for high valuation multiples presented by candidates, with significant earnings growth forecasts, as well as financial indicators that suggest balance sheet distress. 
• The Risk to this screen: The Financial and Utility sectors are not covered in this screen. Moreover, “risk is not a number, it is a concept or notion”, as James Mortiner cited during his time at Société Genéralé. Hence, some stocks due to their business model being realigned to a more profitable approach may appear on this screen, whilst also be a member of more positive value or quality screens.
• 26-stocks appear in our Q1 2019 screen. Eight (8) of which are new, namely from Korea, Japan and Taiwan. Singapore remains absent from the screen for the third quarter running, whilst New Zealand has only presented one candidate in Q4 2018.

• Our screen suggests that risk is increasing amongst the small-mid cap universe, as the Alman Z average score slips to 1.14 in Q1 2019 from 1.16 in Q4 2018 and 1.38 in Q3 2018. Moreover, our average stock in the list has a ranking of 42.3, compared to 54.9 in Q4 2019. 

Our screening styles

For those that follow us, you will know our Stock Ranking system from our Notes from the Silk Road: Setting Out Our Small-Mid Cap Lemonade Stand  For newcomers to our notes, it is merely a tool for identifying favourable and unfavourable stocks. In addition, to add more depth to our selection process we also monitor a series of “style categories” namely:

■ Growth, 
■ Value, 
■ Quality,
■ Momentum, 
■ Deep Value, 
■ Income,
■ Underperformance.

Within these style categories, we drill down further through a series of alpha momentum screens allowing us to differentiate and identify stock picks.