4Q02 surge in operating expenses trims US’s full-year earnings to just Bt86mn

United Securities (US) reported disappointing 2002 earnings of Bt86mn, 20% below our earlier forecast of Bt107mn. Earnings in 4Q02 were just Bt1.3mn versus Bt41mn in the previous quarter and Bt2.4mn in the same period in 2001.

US’s weak performance was due to a sharp rise in operating expenses, coupled with a 76% qoq plunge in fee-based income. In 3Q02 US recorded Bt27mn in fees after it was lead underwriter in three IPOs - DAIDO, STHAI and SSEC. US failed to secure any more lead underwriting contracts in 4Q02, causing its fee-based income to shrink to just Bt7mn.

US’s brokerage market share was relatively flat qoq at about 4%. However, it fell to 3.15% in January and 2.82% in the first two weeks of this month.

This year we expect US’s earnings to fall 11% to Bt77mn for the following reasons: 1) its market share is estimated to decline to 2.50% from 3.44% last year due to growing competition in the securities industry (about half of the company’s trading volume comes from a few large customers); 2) fee-based income is forecast to fall 13% this year to Bt50mn due to its unimpressive IPO track record; 3) costs are projected to rise from 0.157% of the company’s trading turnover to 0.20%; and 4) US will resume paying corporate tax of 30% this year after eliminating all of its retained losses in 3Q02. EPS is expected to decline 27% to Bt0.72 due to dilution from last year’s capital increase (1 new share: 2 old @ Bt5).

We expect US to announce a first-ever dividend payment of Bt0.24/share but this represents an unexciting yield of just 2%. Given our year-end target price of Bt10.74 (based on a 2003 P/E of 15x), we reiterate our SELL recommendation on the stock.

• US’s poor performance in 4Q02 was mainly due to a 62.1% qoq surge in operating expenses. Although total revenue skidded 11% qoq, personnel expenses rocketed 120.1% in the same period. This is even more surprising given that 80% of US’s employees are marketing officers whose income varies with trading volumes. During the previous two quarters, operating expenses represented 0.177% of US’s trading turnover. However, in 4Q02, the ratio rose to 0.295%.

• US enjoyed a market share of 4.15% in 4Q02, slightly higher than its 4.05% share in 3Q02. Commission rates averaged 0.258% versus 0.253% in 3Q02. As market daily turnover averaged Bt5.7bn in the final quarter, unchanged from 3Q02, US saw flat growth in brokerage fees to Bt75mn. Growing competition in the securities industry has caused US to lose market share this year, however. Its market share fell to 3.15% in January and 2.49% on Friday (February 14). We expect US’s market share to decline to 2.50% this year compared to 3.44% in FY02.

Declining market share

Following the private placement of 15mn shares to major clients last year, US’s market share rose from 1.99% in 2Q02 to 4.10% in 2H02. However, its market share has now retreated to roughly where it was before the PP issue (i.e. 2.50% on February 14 or 2.82% for the first two weeks of February).

Despite flat brokerage income, total revenue was down 10.5% qoq (from Bt96mn to Bt86mn) due to a 75.5% qoq plunge in fee-based income. US was appointed as lead underwriter for three IPOs during 3Q02: Daidomon Group (DAIDO), Shun Thai Rubber Groves (STHAI) and Sicco Securities (SSEC). However, all three stocks fell below their IPO price on the first day of trading and remain below their offering prices. This is one reason why US has failed to secure any lead underwriting deals in 4Q02.

Expense vs. Revenue