Focus on strong fundamentals

Focus on strong fundamentals

Any improvement in the Covid-19 situation this month will probably take a back seat to investor concerns about the gloomy economic outlook.

But if it turns out that the third Covid wave in Thailand has indeed peaked and vaccinations start to pick up, we see the SET Index gradually moving higher after a heavy sell-off in May.

The market could also get a lift from speculation about second-quarter earnings, which should kick in around late June, ahead of the first reports from banks and commodity-focused companies in mid-July.

Also helping sentiment will be improving conditions in major economies that have brought Covid under control, vaccinated millions and relaxed entry restrictions. The improved outlook in major trading partners helped boost Thai exports by 13% in April, which should be a key growth driver for the Thai economy in 2021.

Among the negative factors is concern about inflation. The European Central Bank will meet on June 10, followed by the US Federal Reserve on June 16, and investors worldwide will be watching for any signals about when they will start to scale back their huge stimulus. The Bank of Thailand will hold its next policy meeting on June 23. The Fed in particular is expected to begin tapering its bond buying to curb inflation. If this occurs, it will affect negatively fund flows and commodity prices.

A new executive decree authorising borrowing of another 500 billion baht is also a concern, as it could bring government debt close to the legal ceiling of 60% of GDP. Some 300 billion baht of the money is expected to fund relief programmes for individuals and small businesses, but there is concern that some of the spending could be political in nature.

We do not expect the market to cheer the measures, but contractors, industrial estate players and concessionaires could benefit from spending earmarked for infrastructure investment projects. Meanwhile, baht weakness will reduce the debt burden as the currency has been forecast to weaken to 31.50 to the dollar.


The SET Index drifted sideways between 1,529 and 1,596 points in May, retreating to 1,501 in the second week amid panic selling before rebounding to test the major downtrend line that was last tested in late March.

We see the index breaking above the downtrend line at 1,606 and the sideways channel toward 1,620 and 1,650. If it fails to break the resistance, it will pull back to test the lower end of the sideways channel. The trading range in June is expected to be between 1,530 and 1,620 points.

We expect buying interest to increase gradually, particularly in stocks whose movements correlate with the SET Index, and those with strong fundamentals. Hotels and airlines may be among the beneficiaries of an easing of the pandemic. We recommend investors also keep a close watch on the June 16 Fed meeting. Our stock picks for June include:

BCH (Buy, target 25 baht): Our target assumes a weighted average cost of capital of 7.1% and a terminal growth rate of 2.5%, which is equivalent to a 2021 price/earnings (PE) ratio of 26 times. The hospital operator currently trades at an undemanding PE of 21 times, which is a -3 standard deviation (SD) below its five-year average and well below its peers' average level of 38 times. We see second-quarter net profit hitting a record high, which will be a catalyst to the share price.

BEC (Buy, target 19 baht): Our target is pegged to a PE of 44.0 times. Shares of the media company now trade at a 2021 PE of 28.7, well below its peers' average of 42. We believe the strong earnings turnaround outlook in 2021 and strong profit growth of 29% in 2022 have yet to be priced in.

CBG (Buy, target 138 baht): Our forecast is pegged to a 2021 PE of 38 times, close to the energy drink maker's five-year average. We foresee a V-shaped recovery in 2022 after the Covid impact in 2021. Additionally, a potential reduction of sugar content and diversification into hemp products could provide upside to our earnings forecast.

CENTEL (Buy, target 38 baht): We see an upside to our earnings forecast from an expected quick-service restaurant M&A deal in the second quarter. The stock's valuation is attractive, trading at EV/Ebitda of 17 times, which implies 0.5 SD above its 10-year average.

PSL (Buy, target 24 baht): Our target price is pegged to a 2021 PE of 25 times. The shipper currently trades at a PE of 17.7 times, the lowest in a decade and well below its peers' average of 23.3. Historical trading data indicates that the stock generally moves in correlation to its earnings performance and time charter (TC) rates. In 2013, the company recorded a net profit of 528 million and its TC rate was an average of $10,275 a day, while the stock traded in the range of 15-22 baht. We thus see PSL outperforming the SET Index in line with the new commodity price super-cycle (every 12 years).

SAWAD (Buy, target 85 baht): Our target is pegged to a 2021 price-to-book value of 4.7 times, which is the stock's five-year average. We forecast a 20% compound average growth rate for core earnings per share (EPS) in 2020-22 on expectations of higher loan growth and a higher profit contribution from subsidiary Fast Money following the latter's collaboration with the Government Savings Bank.

SICT: We do not cover SICT and there is no Bloomberg consensus forecast. The provider of microchips for card and tag readers has underperformed the SET Index by 5% over the past three months, which we believe reflected concern over shortages of electronic components. SICT, however, has said such a problem would have a limited impact on its earnings.

TIP: We do not cover TIP and there is no Bloomberg consensus. The insurer's stock has outperformed the SET Index by 14% over the past three months, which we believe reflected strong first-quarter earnings. We believe rising demand for Covid vaccine insurance will boost 2021 earnings.

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