In January, the Thai equity market was buffeted by several negative factors. The spread of the coronavirus drove the SET index sharply lower to finish the month at 1.514.14 points.
From Jan 20 to 27, stocks affected directly by the coronavirus, including airport and aviation businesses, hotels, refineries and upstream oil and petrochemical players, dropped by 35-40 points.
Those stocks that suffered an extended decline are expected to give back their early losses once the coronavirus is contained. We believe the outbreak will be contained in February and thus the SET index should rebound to above 1,550. Among the key factors affecting the market:
Trade deal. The US has asked China to amend its intellectual property law by Feb 14 in exchange for a cut in tariff rates to 7.5% from 15%. If Beijing follows through, it will positively affect global equities. China has also agreed to halve tariffs on $75 billion in US imports from Feb 14.
Politics. We expect industrial estate players and contractors to stage a rebound after the Constitutional Court yesterday upheld the legal validity of the fiscal 2020 budget, though new votes will have to take place.
Thai equities, however, will come under pressure from political uncertainty if the charter court on Jan 21 rules that Future Forward leader Thanathorn Juangroongruangkit's loan of 191 million baht to the party was unconstitutional.
Economic growth slowdown. Thai research houses have cut their 2020 estimated GDP growth forecasts to 2.8% from 3.3%, as manufacturing has extended its slide and the tourism sector has grown more sluggish due to the coronavirus outbreak.
Fourth-quarter 2019 earnings. We estimate the fourth-quarter net profit of the SET to grow 27% year-on-year but to slip 4% quarter-to-quarter to 205 billion baht. Final earnings reports must be submitted by March 2.
OUTLOOK AND STRATEGY
The SET index hit a high of 1,604 before it pulled back to break below the major supports of 1,550 and 1,530, which have held for the past three years, to a low of 1,507 in late January. The moving average convergence/divergence (MACD) also crossed below the zero line for the first time in three years.
The trend is to the downside, which is likely to be limited at 1,460 and 1,430, which remain the support levels we expected in January. The upside would be capped at 1,550 and 1,580. The trading range would be between 1,460 and 1,550.
We expect the psychological support at 1,500 to remain intact unless there is a major issue posing a threat to domestic politics. The upside, however, appears limited, and a test of 1,600 looks unlikely in February.
Our three investment themes for the month are:
1. High-growth plays. We believe stocks with a strong business model and decent growth outlook will survive any radical change in the industry.
2. Dividend plays. We like stocks with a track record of paying consistently high dividends, which would generate a consistent return for 20-30% of the portfolio.
3. Concession plays. Stocks tied to concession contracts normally generate a steady, solid stream of revenue.
STOCK PICKS
AOT: We have a Buy call with a discounted cash flow (DCF)-based target price of 88 baht, assuming weighted average cost of capital (WACC) of 7% and terminal growth of 4%. We view a decline in the share price as an opportunity to increase positions, as we believe AOT will stage a strong rebound once the coronavirus is contained, while the long-term growth outlook remains bright with upside from its Airport City project.
BAM: We have a Buy call with a target price of 30 baht, using the Gordon growth model, based on a five-year return on equity (ROE) of 11.6% and terminal growth of 3.5%, which implies a 2020 estimated price-to-book value (PBV) of 2.1 times. BAM deserves to trade at a discount to its debt management peers JMT and CHAYO, due to the company's longer break-even point, but at a premium to bank-tied asset management firms because the banks will sell their non-performing assets within five years.
BTS: We have a Buy rating with a sum-of-the-parts-based target price of 14.60 baht. We see upside to our forecast from the U-tapao airport project and the western route of the Orange Line, for which bidding terms are expected to be released in the first half of 2020.
CPF: We have a Buy call with a sum-of-the-parts-based target price of 35 baht. The stock's valuation remains attractive, trading at 2020 estimated price-to-earnings (P/E) ratio of 14, which is 0.5 standard deviations below its five-year average.
TOP: We have a Hold rating on TOP and a target price of 74 baht, which implies EV/EBITDA of 7.0 (10-year average). We expect a recovery in the fourth quarter from a net loss in the third quarter of 2019, given a return to normalisation in the period.
VGI: We have a Buy call with a sum-of-the-parts-based target price of 12.50 baht, equivalent to a 2021 estimated P/E ratio of 63.4. We value VGI's business at 9.60 baht on a DCF method, assuming WACC of 7% and terminal growth of 3%. We value VGI's investment in PLANB at 0.90 baht based on our target price for PLANB of 11 baht, and in Kerry Express at 2 baht with a P/E multiple of 35 times.
