Charoen Pokphand Foods Plc (CPF) was established in 1978 with operations in animal feed production, livestock breeding, further processing and trade. Currently, CPF invests overseas in nine countries, has subsidiaries in 17 countries and exports to over 40 countries. Furthermore, CPF is today the leading producer of feed and one of the largest producers of poultry in the world. Charoen Pokphand Foods is listed in the Stock Exchange of Thailand under the code: CPF.
The Price-to-Earnings to Growth (PEG) ratio is calculated easily and represents the ratio of the P/E to the expected future earnings growth rate of the company. In theory, a PEG ratio of above 1.0x seems to suggest that the stock is overvalued and vice versa. Let’s apply a modified PEG ratio to 4 countries: Malaysia, Singapore, Thailand and Indonesia.
In an earlier post (see link), one of the screened securities is Hwa Fong Rubber Thailand PCL (HFT or Company), which is a manufacturer of tire and tube of bicycle, motorcycle, and other types of vehicles, such as trolley forklift and golf cart.
Our high-level desktop analysis of the indicative valuation range for HFT:
- Recent 6-month results (FPE 30 June 2016) have shown marginal decline, with annualised revenue growth rate expected to be lower by approximately 1.4% whereas the Company’s PAT margin is relatively lower at 9.9% if compared to FY15 of 16.0%.
- If compared to current trading price of THB4.44 per share, the Company is currently fairly valued, with an indicative valuation range of between THB4.34 per share and THB4.51 per share.
- Some margin of safety is expected if the Company trades at below THB4.29 per share.
Technically, it is observed that there could be possible downward trend in the short term for HFT. Nevertheless, we should expect potential support at THB3.93 per share. Fundamentally, the Company’s trading multiples (e.g P/E, P/B and dividend yield) are not unreasonable at this juncture.
It is important to emphasise that the above desktop analysis is high-level and further fundamental analysis shall be required to further refine the valuation range of the stock.
DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. ANY COMPUTATION SHOWN ABOVE IS STRICTLY FOR ILLUSTRATIVE PURPOSE ONLY. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES OR RELATED INSTRUMENTS MENTIONED ABOVE.
Screening for potentially undervalued securities on Thailand Stock Exchange
We intend to employ a similar equity screening methodology that was undertaken for the Malaysian market (See Link) to screen for potentially undervalued securities listed on the Thailand Stock Exchange (SET). Recap, our screening methodology is predominantly based on the formulae of justified price-to-earnings (P/E) and price-to-book (P/B) ratios.
As shown below, for earnings growth rate of not less than 2.0% and a return on equity (ROE) of not less than 10.0% as well as a required discount rate of 8.0%, we should expect the trading P/E and P/B of the screened security to be at least 13.0x and 1.3x respectively. If the screened security is trading at P/E of below 13.0x time and P/B of less than 1.3x, the screened security may be potentially undervalued based on the justified formulae.
In addition to key parameters such as beta, P/E, ROE, net income growth rate and P/B, we have included additional criteria such as current ratio and leverage ratio to tighten the screening process. The results of our desktop screening are shown below (using CIMB iTrade stock filter):
HFT: Hwa Fong Rubber (Thailand) Public Co. Ltd. engages in the manufacture and distribution of tires and tubes for vehicles. Its products include bicycle, motorcycle, all-terrain vehicle, and industrial tires. The company was founded on June 2, 1987 and is headquartered in Samutprakarn, Thailand (See link).
PRAKIT: Prakit Holdings Public Co. Ltd. is engaged in advertising production, media agency, investing business and providing the management service to subsidiary and associated companies. It operates through three segments: Service, Agency, and Investment. The company was founded in 1986 and is headquartered in Bangkok, Thailand (See link).
SPC: Saha Pathanapibul Public Co., Ltd. engages in the business of consumer goods distribution and property development business. It operates through three divisions: Household Products, Food Products, Personal Care Products and Products for Children. The company also engages in the business of investment in real estate projects and rents office buildings. Saha Pathanapibul Public was founded by Thiam Chokwatana in 1942 and is headquartered in Bangkok, Thailand (See link).
STANLY: Thai Stanley Electric Public Co., Ltd. engages in the manufacture and sale of automotive bulbs, lighting equipment, molds and dies and product designs. Its operations are carried out through the following plants: Bulb Plant, Lamp Plant, Die and Mold Plant, and Research and Development Center. The Bulb Plant manufactures automobile bulbs. The Lamp Plant includes the production of automotive lighting equipment, plastic injection process, and coating and assembly process. The Die and Mold Plant manufactures molds used to produce parts for electrical equipment. The Research and Development Center is responsible for applying the latest technology to the research and development activities needed to constantly improve product design. The company was founded on May 30, 1980 and is headquartered in Pathumthani, Thailand (See link).
The above analysis is a high-level desktop analysis and it does not substitute the need for a detailed fundamental analysis of the above mentioned listed companies.
DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES OR RELATED INSTRUMENTS MENTIONED ABOVE.
The Stock Exchange of Thailand (“SET”) has recorded impressive return since the start of 2016, with its trading pattern backed by an upward trend line and support as per the 200D-MA.
On a fundamental front, SET may appear overvalued, with its price-to-earnings ratio (PER) exceeding 20 times (which is significantly higher than its historical average of 14.45 times since 1989).
From another angle, the price-to-book ratio (PBR) of the SET is currently at a reasonable valuation point of 1.86 times which is relatively lower than historical average of 2.20 times (since 1989).
In addition, the current dividend yield of SET of 3.29% is relatively higher than historical average of 3.02% (in another words, the valuation of SET appears reasonable at this point in time).
The reasonable dividend yield of SET is supported by an increasing dividend payout ratio of SET since 2000:
On a separate note, we are seeing a decreasing return on equity, ROE for SET (i.e below 10%). The higher dividend payout trend may have potentially led to lower funds being retained in the companies for business expansion / growth, which in turn will affect future earnings / profitability of the listed companies.
Furthermore, the market cap-to-GDP for SET appears to be on the higher side at this juncture (signifying potential overvaluation):
Statistical Test 1: P/E vs ROE
In summary – based on the relationship PER vs ROE, it appears that PER of SET of 21.96x is relatively higher than the forecasted PER of 18.64x (signifying potential overvaluation of SET)
Statistical Test 2: P/E vs Dividend Payout
In summary – based on the relationship PER vs Dividend Payout Ratio, it appears that PER of SET of 21.96x is relatively higher than the forecasted PER of 20.64x (signifying potential overvaluation of SET). The statistical relationship based on dividend payout ratio is relatively strong if compared to PER vs ROE.
Statistical Test 3: PBR vs ROE
In summary, the statistical relationship of PBR vs ROE appears weak. Based on this statistical relationship, the current PBR of SET of 1.86x is marginally lower than its forecasted value of 1.97x.
On a weight of “evidence”, SET appears potentially overvalued. Further, we may see future headwinds affecting the Thailand’s economy:
In the 2016 Thailand Economic Monitor released today by the World Bank, fiscal stimulus and tourism are highlighted as the key drivers of economic growth in Thailand, but the economy still faces headwinds on the path to a broad-based and sustained recovery. The slowdown has exposed structural challenges in implementing public investment, maintaining or raising export competitiveness, and addressing skills mismatches, the report said. The aging of the working-age population will begin to affect the Thai economy within the next five years. Kiatipong Ariyapruchya, senior country economist, noted that due to the issue of ageing, Thailand’s working population would shrink by 11 per cent from now until 2040, from 49 million to 40 million. He noted that major headwinds to the Thai economy would also involve a possible delay in mega projects as well as low export competitiveness. In the first quarter, public spending and tourism were major contributors of Thailand’s ecomic growth.
DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE.