Selective plays for growth and post-Covid recovery

Selective plays for growth and post-Covid recovery

Global equities are likely to be volatile as the earnings reporting season winds down, while the Covid-19 situation continues to play a crucial role in market direction.

In Thailand, the performance of new cabinet ministers, US-China tensions and the US presidential election will influence sentiment. We expect the SET index to trade in a range between 1,280 and 1,390 points. Among the key factors to watch in August:

  • Domestic economic activity is gradually increasing with no new local coronavirus transmission reported for 10 weeks. However, we believe that the broader impact of Covid-19 will likely take a toll on earnings performance for the next two quarters at least.
  • The reshuffled cabinet, including new ministers announced on Thursday, is expected to get down to business and introduce new stimulus measures involving public investment. Once the government takes action, we believe that the private sector will follow suit. As such, stocks that stand to benefit from state infrastructure investment, such as contractors, industrial estate players, concessionaires and ICT firms, should enjoy better prospects.
  • As second-quarter earnings reporting finishes on Aug 14, stocks of firms with a strong earnings outlook are likely to rebound. If their results beat the consensus forecast, they are expected to extend their gains in the short term.
  • The Covid-19 outbreak remains critical in many countries, including Brazil, India, Indonesia and the US. Global equities could face a correction if assistance measures from governments and central banks are seen as insufficient to mitigate the impact. In our view, global equities will rebound if the Covid-19 infection rate declines significantly.
  • We do not expect a new trade dispute between the US and China to erupt. As the presidential election in November approaches, relations remain strained after the recent tit-for-tat closures of consulates in Houston and Chengdu.

SET OUTLOOK

We earlier downgraded our 2020 net profit forecast for the SET by 6.2% in June to 670 billion baht from 710 billion baht, and earnings per share (EPS) to 63.30 baht from 67.70 baht. We estimate second-quarter net profit at 130-150 billion baht (excluding THAI), or a decline of 30-40% year-on-year. The banking sector alone reported a drop of 41%.

August outlook: We see a potential rebound in the first one or two weeks, with a trading range of 1,340 to 1,380, with downside risk likely to persist. A breakout above the previous high thus looks unlikely, while a break below 1,300, acting as the support, would result in the index retreating towards 1,270 or 1,250.

Investment strategy: The index looks likely to extend its consolidation phase. However, a break above 1,370, which would imply eased concern, presents an opportunity to increase equity positions in the portfolio.

We recommend selective plays, particularly stocks with strong growth stories and those that stand to benefit from the Covid-19 situation. Among them are CBG, CKP, GLOBAL, PRM, PTG, SMPC, STGT, SYNEX and TACC. Our picks for August are as follows:

CBG (Buy, target 132 baht). The share price has outperformed the SET index by 19% in the past month. Strong second-quarter earnings growth is expected to outpace that of peers, lending further support to the share price.

CKP (Buy, target 5.80 baht). We forecast core profit to skyrocket 252% should the weather remain normal. The key catalyst is a full-year contribution from the Xayaburi hydropower plant for the first time.

GLOBAL (Buy, target 19.50 baht). We forecast 2020 net profit to grow 4.9% to 2.3 billion baht. The blended gross profit margin is expected to widen to 23% from 21% in 2019 on the back of a strong market response to the company's house-brand products and a plan to open five stores this year. Two stores were opened, in Nonthaburi and Ubon Ratchathani, in the first half.

PRM (Buy, target 10.60 baht). PRM's share price has outperformed the SET index by 22% over the past month. We expect a bright second-quarter earnings growth outlook to lend further support to the price.

PTG (Buy, target 20.10 baht). PTG's share price has outperformed the SET index by 17%. We expect strong sales volume and higher market gross refining margins to lend further support to the price.

SMPC (Buy, target 15 baht). SMPC's share price has outperformed the SET index by 38% in one month. Providing support to the share price, exports of household LPG tanks rose 17% year-on-year in the second quarter.

STGT (Buy, target 85 baht). We forecast 2020 net profit to skyrocket by 565% to 4.2 billion baht on expectations of strong demand for rubber/nitrile gloves due to the Covid-19 outbreak and high average selling prices.

SYNEX (Buy, target 12.60). We forecast second-quarter net profit to grow 15% year-on-year and 4% quarter-to-quarter to 137 million baht. We see total revenue rising 10% year-on-year on stronger sales of "work from home" and Apple products. The blended gross profit margin should remain high at 4.4% on stronger online sales and forex gains, while sales and administrative expenses dip. In the second half, we forecast net profit to grow from stronger sales of new phone models.

TACC (Buy, target 7 baht): We have not yet incorporated into our forecast an expansion of 7-Eleven in Cambodia and the potential for the beverage dispenser specialist to become a supplier for Tesco Lotus. TACC's share price outperformed the SET index by 26% in the past month. We believe a return to normal operations by 7-Eleven should bode well for TACC's earnings growth.

Do you like the content of this article?
COMMENT