Third-quarter profit recoveries for Thai listed companies are on track to be stronger in some sectors (especially Electronics and Food) than in others. Earnings quality remains a key theme, given the ongoing risks, including domestic political tension, US election uncertainty and macroeconomic risk tied to resurgent global Covid-19 infections.
Market anticipation of vaccine development, more economic stimulus and a sustained macro recovery (assuming no new round of tight lockdowns) could limit the downside for the SET in the short term. The market could then start rallying as uncertainties start to abate.
We expect aggregate third-quarter net earnings for the SET to fall 29% year-on-year but rise 43% from the second quarter. Business activity has recovered after the unwinding of the lockdown, so sales have improved quarter-to-quarter. Cost-control measures have added meat to some firms' profit margins on top of sales recoveries.
As well, non-recurring items are likely to be smaller in the third quarter. One reason is the flattish oil price (Brent crude was up just 2.5% from the previous quarter as of the end of September, so inventory gains for oil and petrochemical firms will have been marginal). The other is a slightly weaker baht (down 2.3% against the US dollar in the third quarter compared with the second), so firms with substantial dollar-denominated debts will mark modest foreign-exchange losses.
The only sectors likely to report core earnings growth exceeding 10% year-on-year for the third quarter are:
Agribusiness and Food. The key contributors to year-on-year growth are CPF (higher pork prices), TU (improved gross profit, higher sales), CBG and OSP (sales growth and fatter margins).
Electronics. Higher sales and a weaker baht/dollar exchange rate (down 3.1% year-on-year) should enable all electronics firms under our coverage to post higher year-on-year profits, especially DELTA.
Building Materials. Growth was driven by SCC, which we expect to report higher earnings across all its key businesses (building materials, chemicals and packaging).
Finance. Despite some impact from the central bank's interest-rate caps, continued strong year-on-year loan growth and effective cost controls should still enable all finance sector companies under our coverage to post year-on-year profit growth.
FOURTH-QUARTER OUTLOOK
For the SET as a whole, our preliminary fourth-quarter model points to core earnings falling 7% year-on-year and the bottom line shrinking 19% year-on-year. We expect 10 sectors to post year-on-year core earnings growth (against seven in the third quarter). Gainers will include:
Electronics (higher sales orders, a weaker baht), Insurance (led by TQM and BLA), Finance (strong loan growth), Building Materials (SCC and TOA), Food (higher sales and fatter margins for CBG and OSP; higher product prices and sales for TU, CPF and TVO), and Utilities (new capacity). The Media sector will also see high growth because of a mix of improved operations (RS and MONO) and lower costs (BEC and MAJOR).
Of the stocks under our coverage, 42 firms appear likely to post year-on-year net and core earnings growth for the fourth quarter.
The slow pace of the year-to-date recovery in some sectors could translate into more downside to 2020 profit forecasts ahead. However, we see greater scope for earnings projection upgrades for 2021 in the coming months, especially as the economic recovery builds more steam after the release of a Covid-19 vaccine.
The prospects for revival among tourism operators remain poor in the short term, however, due to restrictions on cross-border travel. More economic stimulus could help maintain domestic spending momentum on top of ongoing government investment and improved farm income.
Our SET earnings per share (EPS) forecast is 56 baht for 2020, roughly in line with the local consensus of 56.70 baht, and 84 baht for 2021, above the consensus of 79.70 baht.
