Outlook improves but year-on-year gains rare

Outlook improves but year-on-year gains rare

The SET Index moved sideways up this week in response to the quarterly bounce in reported third-quarter profits, as the resumption of business activity has been encouraging. We expect further quarterly improvement in the fourth quarter, albeit at a slower rate.

In the week ahead, we expect Thai shares will continue to trade in a sideways/sideways up pattern, with news on Covid-19 vaccine developments expected to be a key influence.

Aggregate third-quarter net earnings of companies under Bualuang Securities' coverage were up 35% from the second quarter, though they were still down 33% year-on-year. Core profit rose 34% quarter-on-quarter but slumped by the same amount year-on-year.

Of the 19 sectors under active BLS coverage, only five reported year-on-year bottom-line growth. They included Food (12% year-on-year sales growth, fatter margins for both livestock and beverage firms), Construction Materials (mean earnings before interest and tax [EBIT] margin up 2.8% year-on-year), Electronics (20% year-on-year sales growth, fatter year-on-year margins and a weaker baht against the dollar than a year ago), and Residential Property (11% year-on-year revenue growth, EBIT margin up 50 basis points). Aggregate net profit for the SET was 4% below our estimate, while core earnings were 5% short of our expectation.

For the fourth quarter, we expect a further increase of 4% in net profit on a quarterly basis, enabled by the ongoing business recovery, and a smaller contraction of 26% year-on-year. Core profit is expected to rise 12% on the quarter but will be down 19% from a year ago.

More sectors appear likely to post year-on-year expansion: Electronics (revenue growth, fatter profit margins), Food (rises in sales and margins for both meat producers and beverage firms), Construction Materials (better numbers across SCC's business units), Chemicals (from a low base tied to inventory losses in the fourth quarter of 2019, fatter petrochemical spreads), and Media (recovering revenue, effective cost control).

At the individual company level, we've compiled a list of 50 stocks that should achieve year-on-year growth in net profit after tax, 38 of which have 2021 price-earnings (PE) ratios that are still below their historical means.

Of the earnings forecast revisions for 2021 that have been made so far in November, projections for 28% of widely covered stocks have been revised up, against cuts for 45%. But the overall 2021 consensus earnings per share (EPS) forecast for the market seems to be flattening, after a series of downgrades made throughout the first nine months of the year.

Looking ahead, the sustained macroeconomic recovery, government fiscal stimulus, and news of success in efforts to develop a reliable Covid vaccine are likely to prompt a turnaround in aggregate profit forecast trends in the months ahead.

Our EPS projections for the broad market are 56 baht for 2020 and 84 baht for 2021 (the consensus forecasts are currently 53.80 baht for 2020 and 78.60 baht for 2021). Our SET target of 1,404 points for end-June 2021 is a 4.5% discount to our year-end 2021 target of 1,470, which represents a price-earnings ratio of 17.5 times and EPS of 84 baht.

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