The new cluster and investment sentiment
Thailand is now facing a new round of coronavirus infections with cases jumping in Bangkok and a number of other provinces. The major cluster in this wave appears to have originated in pubs and entertainment areas in the upscale Thong Lor district of Bangkok.
Given the relatively slow pace of vaccinations in Thailand, this latest outbreak has given rise to some panic and affected the investment mood on the SET. With Songkran celebrations just around the corner, the new wave has stoked fears that containment measures -- such as pub closures in 41 provinces -- will curb spending during the holiday and again stall the country's economic recovery.
Before the news of the latest outbreak, the SET had actually climbed to a peak of 1,606.41 points in early April before quickly retreating to below 1,560 as of Thursday. In line with the decline, trading volume this month has averaged less than 80 billion baht per day, well under the first-quarter average of 94 billion.
Despite the market fears, we believe the third wave will be quickly contained and that no broad lockdowns will take place, meaning the economy should be relatively unscathed (compared with last year when lockdowns were widespread).
On the vaccine front, just under 300,000 people have been vaccinated in Thailand thus far. While this is a relatively small number, we note that a big lot of vaccine doses is scheduled to arrive by midyear and will support the vaccinations of more than 3 million people. Additional rounds of doses are expected to arrive later in the year.
Worldwide, the daily new case count has risen again to more than 700,000 after declining to around 300,000 in early March. Covid-19 deaths have increased to around 10,000 per day globally from 6,000 per day in early March. Total cases and deaths worldwide are now approaching 135 million and 2.9 million, respectively.
It appears that Covid will continue to affect the world, even with vaccines. However, people are learning to live in the "new normal" and we should continue to see economic recovery in many parts of the world, starting in mid-2021.
World markets are shrugging off lingering coronavirus uncertainties and marking new highs, especially in the United States. The Dow Jones has now breached the 33,000-point level and should continue to rise, while the S&P 500 index has hit a new high, passing the 4,000 level.
In Thailand, we still believe the downside to the market is not necessarily greater than the upside. We continue to see the SET peaking at 1,600 for this year. As it has already touched this level, investment over the rest of the year should be more selective.
Many recovery-themed plays have jumped beyond their fundamentals, including hotels, consumption and airlines. Thus, we believe switching into "old economy" stocks should be prudent at this stage.
We anticipate the market moving sideways with a trading range between 1,540 and 1,610 points. Our current picks are cyclical stocks with solid fundamentals. Top picks include DCC, NYT, PTT and TASCO.
- DCC has been able to adapt during this difficult time by importing new products with high margins. These products, in addition to lower gas costs, have pushed the ceramic tile producer's gross margin to a new high of 42% in 2020, supporting robust profit growth of 44% for the year. Although gas costs have risen slightly this year, DCC's growth should continue as it has started its own production of large tiles. This will help to offset the higher costs. Another attractive feature of DCC is its dividend. We anticipate a 100% payout ratio and a yield of more than 6% per year.
- The cargo terminal operator NYT, located at Laem Chabang Port in Chon Buri, boasts the highest volume of cars exported through the terminal with a market share of 80% of the country's total car exports. It's also noteworthy that we have seen huge improvement in car exports this year (after reaching bottom in April 2020), with current exports at around 80,000 units per month. NYT's operations have recovered quickly with profit growth expected at 17% this year and 25% in 2022. The company also has an attractive dividend yield, projected at around 5% per year.
- PTT, which has seen its shares slip 1%, is now a laggard play versus the SET, which is up almost 10% for the year to date. Though subsidiary OR has already listed, PTT still hasn't realised a gain from its holding. Another reason PTT is worth a look: world oil prices have risen nearly 15% so far this year. Operationally, we foresee a quick turnaround on stock gains and oil price increases, with profit expected to jump 92% year-on-year in 2021.
- Finally, TASCO is poised to be a big comeback stock. The share price of the asphalt producer plunged to as low as 14.30 baht after the US sanctioned Venezuela, TASCO's main supplier of crude oil. TASCO has subsequently needed to find new supply sources and its production level has dropped significantly.
While the company has already secured sufficient supply through mid-2021, the new US administration may decide to ease or remove the sanctions on Venezuela.
This move would help normalise TASCO's crude supply and improve its production level from 55% of capacity to more than 70%, as before. If that happens, its earnings should get back on track, particularly in 2022.