Thai stocks at just about record low valuation levels -now.
Many Thai stocks I see are trading at a cheaper valuation now then I have ever seen before. Looking at static p/e ratios while not adjusting for present very low interest rates is less then incomplete thinking.
I never understood
this static valuation dogma -so many retail investors have?
P/e ratio's are by
definition a factor of both interest rates and expected future earnings
growth rate. And of course the reasonable conviction in visibility of such
growth rates along with the relative attraction of its industry. If a stocks' expected earnings growth
rate doubles, the p/e rating should as well if not even more. In Finance in
fact we can show the p/e should then more than double due to the exponential growth
factor. (Higher growth on top of higher growth.)
When I first started
Thaistocks.com in 1997, the level of Thai interest rates was far more than triple and more of what they are now. Yes, these then dropped considerably
over the years to since. But even as
compared to today, % rates were much higher all those years since.
So yes, back then a stock’s
p/e of say 4-6 was perceived a great value as I then argued regardless of all
the troubles in those days. Today %
rates have collapsed and so their reasonable p/e's even doubled should still be
viewed as equal investor bargains to back then.
Demco, the long
prominent example here of late, with its good earnings visibility just
reaffirmed and in a defensive industry besides good dividend yield while not
too small of a company--, just now, at a mkt price of 6.5, has a p/e of around 8.
Yes, double the p/e ratio's
we used to get all excited about 10-15 years ago but (and it’s a bit but) with Thai
interest rates halved or more since! And who is going to convincingly
argue interest rates are about to rock up allot again soon!
Besides DEMCO now is a
mid cap company -and Thailand 15 years older.
In those days to get p/e of 4-6 you had to look at companies with very low market capitalization (mkt. cap.) of 40 to 60 mill US$ along with very low average daily trading
volumes in their shares, vs. DEMCO which even now, at this low price, has a mkt. cap. of still
140 mill. US$ and trades relatively well.
Now one can always
talk about up and down grave market sentiment, or the overall crazy SET, or the effect
of all those speculators or short sellers...or not least all these Quant & trigger funds
(which the well known & quoted Thai analyst Andrew S. now adheres to 'hook
line and sinker')...or, 15 years later the still far underreported reality that most
all funds don't invest in Thai smaller cap's., no matter what they say. No matter what all the noise...at the end of
the day its still about: growth rates, reputation of mgt., company
appeal, high dividend yield and yes p/e's -but (and it’s a big but) adjusted
for the general level of interest rates.
And again, we can't
see those % rates rising anytime so soon especially now post the Thai economy
slowdown of late. A couple of years ago (some here will remember) I was told by
the most senior analyst of Bualuang Securities that DEMCO is “not interesting because
nobody ever did a mega wind project in Thailand and so its totally
unproven”. By March ’13 when it was all proven
and successful and all on time, just then that stock maxed out around the price
of 18. So much for the [nebulous]
investor wisdom to await until “its proven”.
Now that its proven
and in full gear moving forward and so many legitimately talk about the rising green/renewable industry
here, this stock is cheaper now then back then (!), adjusted for earnings. The
book value was 2.45 Baht back 2 years ago, vs. 4.45 presently. So even on a
price-to- book ratio the stock is the same value today as back then when I
endlessly pounded the table there. Similar with the expected dividend yield. (BTW,I
am not here suggesting that price to book p/b is the right way to look at DEMCO).
Now some may argue
that back then the company was set to see a large rise in earnings to come, not
to be matched today going forward. OK
perhaps? But again the big analysts said
it was an unproven venture back then vs. today its proven -and then some. Also we all know valuation here is very
much dependent on market capitalization size (mkt.cap) besides the liquidity of
a stock. Surely today DEMCO is a far more liquid (trading) stock then when I
first pounded the table 2-3 years ago.
Again, just as the
prominent example to here be dissected some. Back a couple of
years ago DEMCO was earning about 0.30 Baht per share and trading around 4
Baht, or for a p/e at that time of 13-14…and it was a great investor buy as we all saw
for many months later. Currently DEMCO
is reasonably expected to earn 0.70 Baht per share this year -and more next. At 6.50 today its so trading at a p/e of
8-9. Hence, adjusted for its increased
earnings this stock is trading well below its valuation of back then. When in fact the company back then was half
the mkt. cap. size and average daily trading volume dismal as compared to say
over the past 12 months.
Thank you members for hanging
in there with me on this reading as this is the mighty point: adjusted for interest rates so many Thai stocks
have never been as cheap as they are now!
And those whom just look at static p/e ratio’s and other traditional
measures like nominal dividend yields, while not considering the low levels of
interest rates, are indulging in, dare I say, not with the “full deck” in
thinking.
Also I should add, p/e ratio's is only one key measure of stock valuation, as we show in the CRANE example of late...there
we see how low p/e buyers would never consider this stock. But is that the right? As in another way
this is not where the current deep value there rests. (Time will tell).
The longer term investor as I am sticks to the rational valuation theme.
Today, as back when I started Thaistocks.com, one should today get equally investor
excited now. While still realizing
patience must prevail as is level-headedness because as always the timing for
better rationality is never certain.
Presently so many Thai
stocks, adjusted for these low interest rates, are as cheap as they have been
in near 20 years, or at least since my debut with this web site just post the onset
of the Asian financial crisis in 1998. I
realize there is only one exception to the above analysis and that is if
Thailand goes “to hell in a hand basket” and to that I say a convincing no. Thais are far to resilient & peace loving and contrary to other 'basked cases' unemployment here far too low. Watch and see a solution to the current impasse will be found. We are at a major market bottom and I view to
hold on to everything and go master bargain hunting for those who can around stock values likely only to be had
once every 10-15 years.
Many Thai stocks are
cheaper now then I ever remember before, adjusted for low interest rates which at these low(est) levels just can't be ignored when considering p/e ratio's.
Best Regards,
Paul A. Renaud.
