While the earnings of SET-listed companies fell year-on-year in the first quarter, they were up sharply from the quarter before and also beat consensus estimates by 8.9%, attributable to both normal operations (2% of core earnings) and non-operational items.
But there could be a deeper downside to expected slower economic growth for the rest of this year if the US and China cannot reach a constructive agreement to resolve their trade conflict.
As well, higher severance benefit expenses under the new labour law will be booked in the second quarter of 2019 by Thai businesses that have not done so in previous quarters.
We have reduced our top-down earnings per share (EPS) assumption for 2019 to 105 baht (from 110 earlier), partly due to higher expenses in the second quarter of 2019 and a weaker macro picture. We also have trimmed our SET target to 1,670 to reflect the lower EPS estimate.
Catalysts that would drive the SET index higher depend on both external factors, notably US-China trade talks, and internal factors, especially the quick launch of convincing stimulus measures by the new government. Unfavourable outcomes on either of these factors could pressure the market in the coming months.
Quarterly surge: The stocks that comprise the SET reported an aggregate net profit decline of 7% year-on-year in the first quarter but a 73% jump from the previous quarter. Out of 26 sectors, only 12 posted year-on-year improvements. They included Healthcare (BDMS asset divestment gains), ICT (asset revaluation gains for TRUE and DIF), Finance (healthy loan growth, NPLs under control), Food (higher meat prices year-on-year), Residential Property (higher unit transfers), and Construction Services (higher revenue recognition from backlogs).
Earnings beat consensus: Sectors that posted higher earnings than consensus estimates enjoyed a mix of higher core earnings and non-operational gains. These were seen in Food (higher profit margins), Banking (BAY and TCAP non-operational gains), ICT (TRUE and DIF asset revaluation), Petrochemicals (strong earnings growth at IVL), and Materials (higher profit margins for TOA).
Nine sectors (out of a total of 17) beat consensus estimates, which is in the middle of the range of 6-13 sectors that have beaten the consensus in the past four years. The proportion of SET-listed firms that reported upside surprises (beating the consensus estimate by more than 5%) was 42% -- up from 22% in the fourth quarter of 2018. Some 35% of companies posted weaker results than projected -- down from 57% in the fourth quarter.
Aggregate core earnings beat estimates: For companies covered by Bualuang Securities, aggregate non-operational gains accounted for 10% of core earnings in the first quarter of 2019, compared with 17% in the first quarter of 2018. Operating (core) profit for the quarter fell by 9% year-on-year, but increased 8% quarter-on-quarter, which was 2% above our expectations.
Earnings forecasts trimmed: Earnings forecast revisions remained negative in May. Petrochemicals and Refiners are among the sectors that have seen the deepest forecast cuts this month on the back of weaker petrochemical spreads and refining margins. Further downside could come from the impact of extra employee benefit expenses in the second quarter of 2019 (around 2% of estimated full-year aggregate net profit, partially included in 2019 earnings estimates) under the new labour law.
We have cut our full-year 2019 EPS assumption to 105 baht (down from 110 earlier), which is slightly below the street's figure of 107.60. More downside to earnings could result from a weaker macro backdrop (globally and/or domestically, unfavourable outcome of trade talks), and material differences in oil prices from our base-case assumption of $70-72 a barrel, which would result in potential inventory gains or losses for SET-listed energy firms.
