Focus on stocks with strong earnings growth

Focus on stocks with strong earnings growth

The trend tilts to the downside, but there is a potential rebound on a test of 1,550 points.

The SET index was largely directionless in 2019. The index hit its high for the year in mid-2019 but gave back its early gains late in the year. The trading range was between 1,543 and 1,748, but the index broke below the 10-year uptrend line and closed with a gain of just 1% from 2018.

2020 outlook: The trend tilts to the downside but there is a potential rebound if the index tests the current support of 1,550, having remained above 1,550 in 2019 and opened higher at 1,563 at the start of 2020.

If this occurs, we see the index advancing further towards 1,620 and 1,640. On the flip side, a break below 1,550 or 1,530, which have acted as supports over the past three years, would open the way for a steeper decline towards 1,460 and 1,430.

Positive factors: The SET index is currently trading at an attractive valuation. Any positive news -- the signing of the US-China trade deal or passage of Thailand's fiscal 2020 budget -- should drive the index sharply higher.

The Thai government appears more stable following recent events that have increased its slim majority in the House to 11 seats. A Constitutional Court ruling on the dissolution of the Future Forward Party on Jan 21 could lead to street protests, but we do not flag concern over this matter. Additionally, approval for the 2020 budget on Jan 7 should lend further support to the market.

The US and China, meanwhile, are expected to sign their trade deal on Jan 15. China has cut import tariffs and begin importing US agricultural products as part of the deal, while Washington has cancelled some threatened tariffs and reduced others.

US economic data suggest continued improvement in conditions, while Chinese manufacturing indices are also on the rebound.

Negative factors: Thailand's domestic economy, especially the manufacturing and export sectors, is expected to remain sluggish, with stimulus having limited impact so far.


The SET index appears likely to be rangebound between 1,570 and 1,620 in January. The index could rebound on US-China trade optimism and stronger economic indicators from the two superpowers. Locally, approval of the budget should pave the way for more stimulus and public spending.

Based on the weighting of equities in an investment portfolio, we recommend that stocks with strong earnings growth potential in 2020 make up 70%, with the rest consisting of alpha stocks, which have endured a deeper decline due to the US-China trade dispute. Our January picks, all of which have Buy ratings, are as follows:

BBL (target: 185 baht): The target price implies a price to book value (PBV) of 0.8 times, or -1 standard deviation (SD) below the five-year average. The stock currently trades at a deep discount of 0.7 times PBV, a level last seen during the 2008 financial crisis and -2 SD below the five-year average. This reflects market concern that BBL paid too much for the Indonesian lender PT Bank Permata. We believe the stock will rebound once investors digest the synergy benefit BBL will reap in the long term.

BDMS (target: 28 baht): Our discounted cash flow-based target price assumes weighted average cost of capital (WACC) of 7.3% and terminal growth of 3%. We estimate core profit to grow at a compound annual growth rate of 12% from 2018-21, which is considered strong among large hospitals under our coverage.

BGC (target: 16.30 baht): Our sum-of-the-parts valuation suggests a target price of 16.30 baht. We value the glass packaging container business at 13.90 baht with a 2020 estimated price-to-earnings ratio (P/E) of 15 times based on 2020 estimated earnings per share (EPS) of 0.93 baht. The solar farm business is valued at 2.43 baht on a discounted cash flow basis, using a WACC of 5.5% and terminal growth of zero based our conservative assumption.

COM7 (target: 32 baht): Our target price is pegged to an estimated 2020 P/E of 27 times (+0.5 SD above the four-year average). We forecast EPS to grow at a CAGR of 20.6% from 2018-21.

MTC (target: 68 baht): Our target price of 68 baht implies a 2020 PBV of 7.0 times, the mean of the five-year average level. We estimate EPS to grow at a 23% compound annual growth rate (CAGR) in 2018-20, with return on average equity remaining high at 30% over the next two years.

SPALI (target: 20 baht): Our target price implies a 2020 P/E of 8 times, or -0.5 SD below the five-year average. We prefer SPALI to other property stocks, as its 2020 earnings are expected to grow at a faster pace than the 3.6% average of its peers.

VGI (target: 12.50 baht): Our target price is equivalent to a fiscal 2021 estimated P/E of 63.1 times. We value VGI's business at 9.60 baht using the discounted cash flow method, assuming WACC of 7% and terminal growth of 3%. VGI's investment in PLANB is valued at 0.90 baht based on our target price for PLANB of 11 baht. In addition, VGI's investment in Kerry Express is valued at 2.00 baht with a P/E multiple of 35 times. VGI deserves to trade at a premium to its peers in expectation of relatively higher EPS with a 23% CAGR from fiscal 2019-22.

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