In search of defensive stocks

In search of defensive stocks

Global equities have been on a sharp downtrend ever since China began its lockdowns in late January in hopes of containing the spread of the coronavirus. The Thai bourse has also tracked the global weakness. The SET index has plunged 28% to a level equivalent to a price/earnings (PE) ratio of 12.6 times, which is an eight-year low.

Based on the current pace of new Covid-19 cases, the infection rate is likely to reach a peak in April, or May at the latest. If this occurs, we estimate the pandemic will cause global GDP to decline by 3%.

However, we believe investors have already digested the lockdown impact and the SET index should stage a rebound towards 1,200 points this month. Among the key factors to watch in April:

  • The SET index may have hit its trough, given the steep declines we have seen in recent weeks. Abundant liquidity from major central banks should slow sell-offs. In Thailand, there is potential for the injection of substantial funds -- especially from institutional investors and the new Super Savings Fund (SSF) -- into equities if the Covid-19 outbreak is contained.
  • Investors will get their first look at how tough the first quarter has been for Thai listed firms when banking and finance firms begin reporting their results on April 13.
  • The SET index's aggregate net profit in the first quarter is forecast to drop by 50 billion baht or about 20% from the fourth quarter of 2019 due to the Covid-19 outbreak.
  • Global crude oil prices have fallen 60% for the year to date, affecting the earnings outlook for local energy companies that represent a major component of the SET.
  • Signs of recovery are already appearing in China, where the manufacturing purchasing managers' index (PMI) has bounced back to 52 from 35. Any number above 50 indicates expansion.
  • The Bank of Thailand recently downgraded its 2020 GDP forecast to a contraction of 5.3% to reflect the Covid-19 impact, with tourism particularly hard hit.


We see a high probability that the aggregate 2020 net profit of the SET will drop by 20%, or about 200 billion baht, which would result in earnings per share (EPS) declining to 68 baht from 86.80 baht.

Consequently, we have revised our year-end SET index target to 1,242 points from 1,586. Both net profit and the index will perform better than expected if the Covid-19 outbreak is contained sooner, rather than later, and the global and domestic economies rebound sharply as a result.

KTB Securities Thailand expects the SET index to gradually advance to between 1,162 and 1,200 points in April, as we believe the index has already hit a trough at 969, surpassing the low of 1,022 seen during the subprime crisis 12 years ago.

Global equities recently bounced back, tracking the strength in the broad US markets after liquidity injections from major central banks and the Federal Reserve. But Wall Street came under renewed pressure this week as the Covid-19 outlook worsened in the US. In any case, bargain hunters are expected to scoop up shares, which could temper the weakness somewhat.

Looking back at the SET index during the subprime crisis in 2008-09, Thai equities bounced back after hitting a trough in late October 2008. The S&P 500 index, in contrast, continued to extend its decline for another five months before it staged a rally.


We recommend seeking defensive stocks and those that have declined steeply amid the uncertainty arising from the Covid-19 outbreak. Our stock picks for April include:

ADVANC. We have a Hold call with a target price of 225 baht based on the discounted cash flow (DCF) method, assuming weighted average cost of capital (WACC) of 8.7% and terminal growth of 2%. The key catalyst is strong data consumption, which will be a key growth engine in the long term.

CPALL. We have a Buy rating with a target price of 91 baht, which is pegged to a 2020 PE ratio of 34 times, or 0.5 standard deviations above its five-year average.

MEGA. We have a Buy call with a target price of 35 baht, which is pegged to a 2020 PE ratio of 24.3 times. MEGA's share price has underperformed the SET index by 17% in the last three months.

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