Another growth company with high yield -trading below market SET averages.
The aim of my investment research views, regularly expressed here, are always to taken as seen from a longer term perspective. These are just my own views and are never to be taken as recommendations, nor specific investment advise. Investing is an active process which must be regularly monitored. "Buy and just hold forever" is no longer appropriate in a fast changing world. Just like day trading can often lead to poor results down the road, so can an investment approach which never changes.
A few have expressed lately that the Indian stock market is the place to be now. This after the fact, as most stocks there had a nice ride in the past several months. I think their index is up some 25% during the past 3 months. While I do not dispute that this market offers many opportunities to the informed, with thousands of small caps stocks, surely there are plenty of risks as well. Further, I think the small cap negelect syndrome is not the same in India, as it is here.
The Indian market as a whole is trading around a 2005 p/e of 17 or considerably higher then the Thai SET index, which is just now trading around a p/e of 10-11, on expected full calendar year 2005 earnings. The average dividend yield is 1.5 to 1.8% for Indian stocks, vs. 4.5% for Thai stocks. But we all know that select Thai stocks are expected to pay considerably higher annual yield then this low SET avarage; even after the recent market run-up. "Averages" are much misleading on the SET -as well as in Thailand in general.
Thailand"s main investment climate changes, as compared to say at the start of the year are, as I see it:
1) Less political content. As more and more of the general population are less happy with the Prime Minister"s performance, now in his second term in office.
2) Higher Oil prices. This is more concerning here, as when compared to more developed markets -as Thailand consumes more oil, per GDP unit of growth, then more developed economies. Thailand is a very in-efficent energy consumer. A correction in global Oil prices would be very bullish for the SET.
3) A tightening monetary policy by the Thai Central Bank. This to combat perceived accelerating Thai price inflation. Not all experts agree with this policy move at this time as the Thai economy is slowing already.
4) Continued economic softening. As is induced by consumer caution which was dealt a minor one time "jolt" when Diesel prices got lifted from subsidized to market prices along with Gasoline prices which increased some 50% in less then a year. This is the reason why the consumer inflation numbers of July are misleading.
We must balance these mid-year 2005 negatives with other changes happening, at the margin.
a) The Thai government is set to spend some 1.7 trillion Baht in infrastructure projects over the next 5 years. A huge sum by any count, which will balance consumer weakness and inject allot of capital spending into the Thai economy.
b) While the Prime Minister has lost some of his appeal just now, surely there remains political stability in Thailand. As compared to the 1990"s unstable politics was back then the clear negative -and so a real de-stabilizing force.
c) The Thai market has underperformed many other stock markets for some time and so a long period of consolidation has now probably passed. Valuations are often at less then half of where they were 10-15 years ago. In the previous economic expansion of the early to mid 1990's, the general level of interest rates where triple as compared to now, besides political stability was near non-existent. (For a sober valuation view currently, on smaller cap stocks, as compared to 10 to 12 years ago (the last bull market) see a seperate research piece posted in our member lounge by a member.
d) We are probably nearing the bottom of the Thai economic weakness cycle and as soon as the market perceives the worst is present and passing, the market will set a bottom. I think probably this now has already happened with foreign money flowing in for many days already. (I expressed here several weeks ago that I did not see the SET index hitting 620, as many local brokers then predicted).
In any event, my well stated investment strategy this year has been and remains to be maximum bullish on Ticon (10.5) whose stock price has increased some 85% since late last year. This so, despite the SET market being in a bearish phase since the end of the first quarter -and all the way up until end of July. I recognized at mid-year 2005 that various stocks looked like bargains and hence started to think it made some sense to diversify a bit out of the winning position. I made it very clear: my enthusiasm did not vane on Ticon, instead it was purely initiated to take advantage of oversold other SET value stocks and to so clearly express my contrarian optimism at mid year. To date my other secondary selections, namely TCB, SE-ED, SEAFCO and PTL have not worked out, yet. Ticon on the other hand keeps being the performance star and, as well noted, remains a full 50% position in my newer expanded model portofolio.
Today I take a closer look at PTL (5.4), one of the recent stock selections to my currently running model portfolio. Below are my summary points leading to my positive opinion. I would rate PTL "a buy for growth besides high dividend yield".
A few months ago I here clearly wrote that I now favored Polyplex (PTL) over AJ Plastics. AJ was a previous selection. But, earlier this year, I advocated reducing exposure as I recall, then around 7 Baht per share. I very much maintained this view and reiterated this changed opinion in our member lounge, a few times and for some time.
The first thing to understand with PTL is to get rid of some common misunderstandings and grasp a better overview with some lesser understood facts. Here are my summary bullet points:
---While PTL is listed in the packaging sector of the SET, only around 40% of its total sales go to this segment. 28% goes for industrial use, 12% to Electrical, 13% for Magnetic and 7% for imaging. PTL exports 90% of its production so the Thai economic softening judy now is not a significant factor to PTL.
----While some would want you to believe PTL is just another small cap. company etc.., in fact PTL is the fourth largest producer of Thin Pet Film in the world! This, after their new Turkey plan commences operation this October 1 (for tpa PET film), PTL will then have a total capacity of 83,000 tons per year. only 2 Companies in Japan (Mitsubishi & Toray) and USA"s Dupont are larger in this business. Previously PTL was the fifth largest producer. Mitsubishi seems to be a lame and dormant leader. Dupont is too far from the emerging growth markets.
---PTL is largely immune to rising oil prices as only around 4% of sales is for power and fuel expenses and the company is working just now to switch over to Natural Gas; this will reduce their total power expense besides provide a cleaner source of energy. Further, unlike AJ, PTL makes their own resin which is the key raw material. Pricing and profit margins are supply demand driven rather then raw material price driven.
---PTL produces for the world. only 10% of sales is for the domestic market, yet in Thailand PTL commands a 30% market share. 25% of total sales goes to USA, 25% to the EU, 30 % to Asia. Hence, PTL is highly export driven. Clearly, a long term secular appreciation of the Thai Baht vs. the US dollar, would hurt PTL margins. Yet, lately the Baht has lost some value vs. the US Dollar.
---PTL has a very strong balance sheet with no long term debts. It is the global leader in its market due to operating in low cost locations besides supplying many of the global growth markets. While profit margins are dropping a touch this year, sales volume is increasing to offset this. PTL is a forward and backward integrated company.
---PTL is a Thai listed public company. It"s operations, balance sheet and profitability is not mingled nor combined with the Indian company. This was confirmed at our company visit.
---PTL is not a polluter. Polyester film is a green plastic which is fully recyclable. Polyester resin chips is potentially more polluting but PTL meets or exceeds all pollution requirements on this.
---PTL is not experiencing any water shortage at their plant. However PTA (another listed company) is a supplier or raw material to PTL which operates at the Siam Eastern Industrial Park in Rayong Province). Some reports recently have suggested/feared they may face water shortage in the future. Yet, Thailand is currently in the rainy/monsoon season and so rainfalls should alleviate this fear and the government is addressing the problem. We were invited to tour the factory anytime.
---PTL pays out tax free dividends to stock investors due to full BOI tax privileges. Besides this waiver of the 10% dividend withholding tax, the dividend yield on PTL shares well exceeds the average yield of SET listed companies. And this is expected to continue. My estimate, based on the current market price of 5.5 Baht, is that the dividend yield over the next several years should approach 7% this year -and exceed this yield next year.
---There are 800 mill. shares outstanding and PTL usually trades well in excess of 1 million shares per day. The PAR value was reduced last year, from 5 to 1 Baht. PTL had its IPO at 6.9 Baht per share in late November of last year. Since then its earnings projections have not dissapointed. I estimate the earnings per share (EPS) for this year to be around 0.95 Baht, hence the current p/e is an undemanding 5.7 -or close to half the SET averages. I do believe there will be growth in earnings and dividends for next year and beyond. The business cycle seems to be improving, going into the second half of year 2006.
---The new Turkey plant (a 100% owned Singapore subsidiary) will serve the EU market and will add 40% to capacity. The expected internal rate of return (IRR) is around 20% for this venture. Turkey not yet joining the EU is a mild positive to PTL, this due to tax incentives granted which would/will be waived if/when Turkey joins up as a new EU member.
---PTL enjoys high operating rates and utilization combined with low manufacturing costs. Probably the lowest in the world. A few years ago, Polyplex was making profits and generating high returns on its assets while US industry lost money. Return on equity, return on assets, net profit margins, debt to equity… any way you look at it, PTL beats its local competitors by a wide margin (local competitors are AJ and TFI). Yet the valuation of PTL does not seem to take this into account. I note especially the impressively declining debt and leverage ratios (zero debt status), the very high capacity utilization along with considerably better profit margins, compared to other global producers/competitors.
Morgan Stanley is a large long term shareholder, owning some 30% of the outstanding shares since the IPO. Management does not own any of the Thai listed PTL shares. PTL seems to me to be a very pro-active shareholder investor relations company and with a capable managment which has a solid reputation.
This stable and competent management team, the no debt besides high capacity utilization, along with the new growth prospects due to their October 1 start-up in Turkey, adding considerable new capacity, seem to indicate an investment were high yield and growth should fuel the stock price higher, in time. I came away feeling bullish on PTL.
Best Regards,
Paul A. Renaud.
