Look to strong earnings prospects for selective buys

Look to strong earnings prospects for selective buys

The SET Index will likely extend its gains this month, moving in a trading range between 1,440 and 1,530 points. We expect domestic economic activity to gradually pick up as the government has eased Covid-19 restrictions in most provinces.

On the external front, positive response to the policies of US President Joe Biden and continuing progress of Covid vaccination programmes should fuel foreign funds flowing into emerging markets. Additionally, the prospect of revised earnings forecasts as fourth-quarter results continue to emerge could influence the market's direction. Among the positive factors:

  • Earnings in some cases have topped expectations, which had been modest given the impact the pandemic has had in the past year. With reporting continuing until March 1, we expect heavy speculation on stocks that are expected to report strong results and/or those with a brighter outlook for 2021.
  • The easing of Covid restrictions in nearly every province has given rise to hope. Schools have reopened and most business activity is back to normal, with new daily cases dwindling to the low double digits in a handful of provinces. The only exception remains the hot spot of Samut Sakhon, where active testing continues to find hundreds of cases daily in the migrant worker population.
  • The Bank of Thailand this week left its benchmark interest rate unchanged. This will provide positive sentiment for the banking sector, given earlier predictions that the policy rate might be halved, which would have squeezed banks' margins. The decision also reinforces our view that the domestic economy will improve to a level seen before the first Covid outbreak.
  • Negative factors: The coronavirus continues to spread at a rapid pace, worldwide, with the caseload approaching 105 million and lockdowns still in force in some places. And while millions of people are being vaccinated in 60-plus countries, it's not clear if all vaccines will be effective against new and potentially more dangerous strains. All of this means the global economic recovery remains fragile, with implications for equities.
  • ECB rate decision: While the US Federal Reserve has maintained its near-zero rate and given no sign of a change, European Central Bank policymakers have said there is room for a rate cut. This could cause volatility in global equities. Additionally, crude oil prices and inflation may negatively affect stocks.

INVESTMENT STRATEGY

The SET Index gained in January. After breaking below the uptrend line and the 10-week moving average, the index hit a high of 1,561 before retreating to 1,455. In February, a break below the 1,455 support should open the way fora further pullback. If this occurs, we see the next support at 1,400 and 1,370. Resistance levels are at 1,500 and 1,540. We recommend selective buying, focussing on stocks of companies that are expected to report strong earnings results and/or those with a brighter outlook. Stock picks for February include:

  • CHAYO (Buy, target 11 baht): Fourth-quarter net profit is expected to jump by 126% year-on-year and 39% quarter-on-quarter, on a 79% annualised increase in total revenue. As well, the debt and asset management firm is expected to book a gain of 20 million baht from sales of non-performing assets.
  • KBANK (Buy, target 160 baht): The bank's shares currently trade at an attractive 2021 price to book value of 0.7 times, which implies a 1.75 standard deviation (SD) below its 10-year average. Its Tier 1 capital of 18.8% is well above the Bank of Thailand's minimum requirement of 9.5% and the banking sector's average of 15.7%.
  • NER (Buy, target 5.40 baht): Earnings prospects for the rubber processor look bright amid a change in marketing strategy. We forecast 2021 net profit will grow 40.1% to 1.15 billion baht as capacity utilisation increases to 410,000 tonnes per year from 340,000 tonnes in 2020. As well, gross profit margin should remain flat at 10%, while sales, general and administrative expense will be steady at 3.6% of sales.
  • PTTGC (Buy, target 70 baht): The price of high-density polyethylene (HDPE) is trending upward, which will boost demand for plastic pellets, amid optimism that vaccinations will slow the global spread of Covid-19. We forecast HDPE prices will increase 13% to US$995 a tonne, reversing the 11% decline in 2020.
  • SPALI (Buy, target 25 baht): We forecast the developer's 2021 net profit will jump 38% to 5.9 billion baht on a 26% rise in revenue, with the gross profit margin inching up to 40% from our estimate of 37.8% in 2020. A backlog to be recognised in 2021 will account for 63% of our 2021 revenue forecast, which includes a start of three large-scale projects and the continued transfer of units at Supalai Oriental Sukhumvit 39. Most projects for which transfers are in the pipeline this year generally provide high profit margins.
  • XO (Buy, target 16 baht): We forecast the food processor and exporter will report a 157% jump in 2020 net profit to 314 million baht, with a further rise of 19% to 373 million in 2021.


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