The SET Index has been moving sideways in recent days. At midweek the index tested a high of 1,561, then corrected afterwards. We witnessed sector rotation from commodity stocks to domestic consumption, as the market speculated on sizeable government stimulus, both locally and in the United States.
We expect Thai shares to continue in the sideways/sideways down pattern for another week. Investor concern about a liquidity drain (as a result of the massive PTTOR initial public offering) will limit market upside in the short term.
The key focus for this week will be possible government decisions to ease movement restrictions in some provinces as the number of new locally transmitted Covid-19 cases starts to stabilise. Among the positive factors that could influence trade:
- Earnings improvement: The fourth-quarter aggregate net profit of the SET is forecast to increase 22% from the third quarter. And while that's still a drop of 15% year-on-year, it represents an improvement from the 34% plunge seen in the third quarter. Core profit, meanwhile, will be down 23% year-on-year but up 6% from the third quarter.
- Business activity and demand continue to recover, supported by additional government stimulus. Businesses' cost-control measures have also added meat to profit margins on top of sales recoveries.
Looking ahead, we see SET core earnings increasing 17% in the first quarter of 2021 from the fourth quarter of 2020. Our preliminary model also points to a shallower year-on-year dip of 6% in core earnings and a 57% jump in net profit. Covid started materially affecting business in the final two weeks of March 2020, hence the low year-on-year bases for some sectors.
We expect nine sectors to post year-on-year core profit growth in the first quarter (against 10 sectors in the fourth quarter of 2020): Chemicals (wider product spreads), Contractors (CK reverses the loss seen in the first quarter of 2020), Industrial Estates (higher land transfers), Electronics (higher sales), Insurance (TQM and BLA improvement), Residential Property (higher transfers), Media (lower costs), and Utilities (new capacity).
Local analysts' consensus 2021 SET earnings-per-share (EPS) forecast, which rose during the fourth quarter of 2020, has slipped in recent weeks on diminished optimism over the outlook for tourism and transport plays. Thailand's new Covid outbreak will delay the recoveries of tourism and transport businesses, and some consumer plays affected by reduced willingness to spend.
The roll-out of Covid vaccines by midyear could boost confidence in the economic recovery, eventually translating into broader upgrades to profit forecasts.
Meanwhile, sharply higher crude oil prices (Brent recently hit $57 a barrel; we had earlier assumed only $47) will probably lead to upward revisions in forecasts for oil and gas and chemical companies. A 10% gain in the oil price could add 3% to overall SET EPS. Our EPS forecast is 54 baht for 2020 (the consensus is 54.20 baht) and 86 baht for 2021, against a consensus of 76 baht.
RECOMMENDED SECTORS
With the earnings announcement season now under way, focus on fourth-quarter earnings plays. The only sectors likely to report core earnings growth exceeding 10% year-on-year for the fourth quarter of 2020 are:
Agribusiness and Food: The key contributors to year-on-year growth are CPF, TFG (higher pork prices), TU (improved profit margins and higher sales), CBG and OSP (sales growth, fatter margins).
Electronics: Higher sales should enable all the electronics firms under our coverage to post higher year-on-year profits, especially DELTA and KCE.
Chemicals: Fatter product spreads (high-density polyethylene up 78% year-on-year, polypropylene up 44% year-on-year, MTBE and specialty products) and sales volumes will enable PTTGC and IVL to post year-on-year turnarounds in core numbers.
Shipping: Even though the Baltic Dry Index, the benchmark for global freight rates, was down year-on-year, average freight rates for PSL rose year-on-year.
Insurance: Both TQM (strong revenue growth) and BLA (higher return on investment) should post higher year-on-year profits.
Potential negative factors to keep an eye on include weaker economic momentum, both globally and in Thailand; sharply lower oil prices; and geopolitical tensions or trade conflicts.