Focus on laggards poised for post-coronavirus revival

Focus on laggards poised for post-coronavirus revival

The SET index is expected to trade between 1,300 and 1,400 points this month, although it already powered past 1,400 on Thursday. Thai equities are likely to lag their peers given the subdued tourism outlook amid weak spending power. Global market volatility could ease in light of the improvement in the Covid-19 outlook and the easing of restrictions in many countries.

Key factors: Investors have already digested the worst-case scenarios. We do not expect a second coronavirus wave in Thailand, and we believe economic activity will gradually return to normal levels. The export and tourism sectors are expected to recover ahead of others, while low interest rates and quantitative easing in many countries will lend support.

One lingering concern is the prospect of a renewed US-China trade war, especially if Washington takes a hard line on China's move to impose a tough security law in Hong Kong.

The Thai bourse, however, is losing its attractiveness against peers. Aggregate 2020 net profit of SET-listed firms is expected to drop at least 20% year-on-year, worse than many peers, as earnings of heavyweight stocks, particularly in the energy, petrochemical, banking and property sectors, are expected to improve slowly.

Thai GDP may contract at a faster pace than the forecast of 6% if the government's economic stimulus package fails to make a meaningful impact. This would keep a lid on gains in the Thai bourse, with foreign investors staying on the sidelines.

Forecast updates: We have downgraded our aggregate 2020 net profit forecast for the SET to between 670 billion and 710 billion baht, down 20-25% year-on-year. The oil price collapse and baht weakness resulted in first-quarter net profit falling short of expectations by 70 billion baht.

The second quarter will be grim, given the impact of the pandemic on the tourism and commerce (retail) sectors, but we expect net profit to gradually improve from the third quarter.

We have cut our 2020 earnings per share (EPS) forecast to between 63.70 and 67.80 baht from 86.70 baht earlier. The significant reduction reflects the dilution effect of large IPO events such as Asset World and CRC. Our 2020 SET index target of 1,241 implies a price/earnings (PE) ratio of 18.3 times, or +0.5 standard deviations (SD) from the average of 16.8 times.

Technical view: The index extended its gains in May, but the pace of increase slowed compared with April. The trading range was 1,252 to 1,358, or 106 points. Considering a trough at the 969 level, the index surged by 389 points, or 50%, and thereby broke above the five-day simple moving average (SMA) line in the monthly chart for the first time since August 2009.

For June, the SET index looks likely to hold above the five-week SMA line at 1,300 with a possible test of 1,390 and 1,420. But it could pull back slightly after failing to break above 1,360 in May. Support levels are at 1,320 and 1,300.

Investment strategy: Laggard stocks, particularly those that have been affected badly by the Covid-19 outbreak, are expected to rebound sharply. Big-cap stocks may rise further, but only slightly after their extended gains earlier. Among the pandemic-affected laggards that we see as strong growth stories are BBL, CBG, ERW, PRM, SMPC, STA and STEC.


BBL: Buy, target 130 baht. Expect upside from the consolidation of PT Bank Permata from the third quarter. We remain positive on BBL's investment in the Indonesian lender and expect an upside of 10% to our 2020 earnings forecast from consolidating financial statements from the third and fourth quarters. We will re-rate our 2020 price to book value multiples if the return on equity in Bank Permata is above 10%.

CBG: Buy, target 118 baht. CBG's share price advanced last month and outperformed the SET index by 17%, which indicates a moderate impact from Covid-19. We see a limited downside risk from the current share price because the valuation looks attractive, trading at a 2020 PE ratio of 31 times. As well, we estimate a 20% compound annual growth rate in net profit from 2019 to 2021.

ERW: Hold, target 3.20 baht. Second-half earnings are likely to swing back to positive territory. We expect ERW to feel the impact from the lockdowns across the globe, with a net loss of 579 million baht compared with a profit of 446 million baht in 2019. But we expect earnings to swing back to positive territory in the second half.

PRM: Buy, target 9.70 baht. Second- and third-quarter net profits should move higher. We forecast full-year net profit to grow 19% year-on-year to 1.22 billion baht in light of increased rental rates of floating storage units, which we believe will offset the impact from weaker demand for domestic oil tankers. Providing support to second- and third-quarter earnings, we expect the company's foreign-exchange loss to narrow from 77 million baht recorded in the first quarter. As well, demand for domestic oil tankers is expected to improve in the third quarter.

SMPC: Buy, target 12.70 baht. Sales of gas tanks jumped during the Covid-19 lockdown amid lower gas prices. Although the lockdown affected logistics, it spurred great demand for new gas tanks as people opted for more home-cooked meals. The decrease in gas prices along with the oil price collapse provided further support.

STA: Buy, target 27 baht. STA's share price surged over the past three months and outperformed the SET index by 127%. We see a limited downside risk from the current share price, as the stock's valuation looks attractive, trading at a 2020 PE ratio of 14 times, close to the five-year historical mean. A key catalyst is the strong second-quarter earnings outlook amid growing demand for rubber gloves.

STEC: Buy, target 17.40 baht. STEC's share price has been in line with the SET index over the past three months. Despite this, the stock's valuation remains attractive, trading at a PE ratio of 16.6 times 2020 earnings, or 2 SD below its five-year mean.

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