Reviewing the fourth-quarter 2018 earnings performance of SET-listed companies, we find the results disappointing overall. According to data from the Stock Exchange of Thailand for 599 of 613 listed companies (as of March 5), net profit in the quarter fell 37.8% year-on-year and 40.3% quarter-to-quarter. The quarterly numbers resulted in full-year 2018 net profit that was down 1.3% from 2017.
On the Market for Alternative Investment, the fourth quarter of 2018 was a disaster with net profit plunging 87.8% year-on-year and 92.6% from the previous quarter. Even so, full-year net profit still managed to eke out a 2.3% increase from 2017.
For the fourth quarter of 2018, SET Energy earnings tumbled 68.8% year-on-year and 68.1% on the quarter, while petrochemicals were not far behind, down 60% on the year and 65% for the quarter. The misses reflected factors including inventory losses, low production volumes and narrower gross refining margins.
Telecom sector earnings were wiped out by the combined losses of True, DTAC and Thaicom. Operators suffered from competition, one-time impairments, accounting adjustments and litigation settlements.
The ICT sector was a similar story with profit dropping 90% both year-on-year and quarter-to-quarter. Bank earnings, meanwhile, were hit by provisions and ended up flat year-on-year but lower by 24.6% from the third quarter.
COMMERCE A BRIGHT SPOT
Small-cap businesses saw earnings decline by an average of 50%. On the bright side, the SET Commerce sector's earnings per share (EPS) grew 2.9% year-on-year and 11% quarter-to-quarter, and the property sector grew 11.5% annually and 34.2% quarterly.
For the full year, major sectors such as banking, energy, petrochemicals and commerce saw profits rise 3-8%. But some other big sectors saw annualised declines, such as construction (-9.4%) and property (-1.7%). In sum, the 1.3% drop in SET net profit for 2018 marked the worst year-on-year performance since 2015.
Earnings of listed companies reflected the weak overall business environment in Thailand last year. This contrasts with GDP growth, which was the highest in many years at 4.1% and driven by tourism and exports. Other sectors were not so bright, as reflected by a steady stream of earnings downgrades throughout the year, ending in declines from the previous year.
For 2019, we have revised down our GDP growth forecast to 3.5% to account for a significant impact from lower exports and slower-than-expected government spending on infrastructure projects. We also see a downside to our current 2019 and 2020 net profit forecasts of 6% and 10%, respectively. And with the baht turning stronger than previously expected and operations in a number of sectors weakening, we may not have seen the last of the 2019 earnings downgrades.
The investment outlook for this month is highly geared towards the general election on March 24. Surprisingly, foreign investors were not net buyers of Thai equities in February when the election date was confirmed. Uncertainty around the new rules for the election could be dampening their confidence. Some may also be waiting to see the final outcome of the vote and the composition of the next government before re-entering the market.
Indeed, the election result remains difficult to predict and there is potential for the result to heighten political tensions and volatility in the stock market. Another key factor could be the baht, which has strengthened to almost 30 to the US dollar.
That said, we continue to see a mild uptrend for the market, as boosting the economy should be the priority of whichever new government coalition is formed. This should positively affect earnings of listed companies and help earnings recover from the disappointing 2018.
PEAK SEEN AT 1,710
Supported by the election, we see the SET peaking at 1,710 points in April. Technically, we see 1,630 as an important support. Regardless of the aforementioned uncertainties, the election should still prove a primary catalyst this year.
We flag the month of May for an XD effect which could push the SET down before picking up again in late June. In the second half of 2019, we expect the SET to find support in the new government taking office and easing volatility. Foreign investor sentiment, a key to a sustained break above the 1,700 level, should be bolstered by the establishment of a new government.
At present, we believe market volatility warrants a highly selective approach. As such, we recommend investing only in fundamentally strong stocks with potential to perform even under weakening economic conditions. Our top picks at the moment include SCC, STEC, BTS and JWD.
SCC is recommended as a fundamentally sound stock that can be a safe haven from poor economic conditions. STEC's net profit beat market expectations in 2018, and we expect further growth in 2019. BTS is steadily opening new routes, and these will be mostly company-owned and -managed, which positions BTS for stable revenue growth for the foreseeable future.
Meanwhile, JWD is a turnaround story for huge profit growth of more than 50% this year, backed by both improvement in current business and the addition of new businesses.
