The SET Index is expected to move higher amid an easing of concern over the government's Covid-19 vaccine management. Stocks that have been hard hit by the pandemic are likely to attract investor interest. Earnings speculation will also come into play as second-quarter reports start arriving in mid-July.
Positive factors include a steady rise in Covid vaccination coverage, which should be a tailwind for the economy. A total of 10.2 million people or 15% of the population have now received at least one dose, with 4.3% having received two shots.
Meanwhile, more economic stimulus measures are also expected to attract investors to the Thai bourse. As well, buying interest should increase, particularly in stocks of firms expected to report strong second-quarter earnings.
Negative factors include uncertainty about US monetary policy. Some now expect the Federal Reserve to start raising its key short-term interest rate as soon as the end of 2022. Investors also want to know how soon the Fed will start to scale back its large-scale bond purchases. Markets could be volatile until the next Fed meeting at the end of July.
Locally, political protests have resumed, albeit on a smaller scale given Covid concerns in the capital. Demonstrators are unhappy with the lack of progress on constitutional amendments, with only minor changes approved by parliamentarians. In any case, the impact on the market appears to be insignificant so far.
In June, the SET Index was volatile, moving in a range between 1,565 and 1,642 points. The index nosedived in mid-June before rebounding to hit its high for the month. Despite the volatility, the index has held above the medium-term uptrend line.
There is a likelihood that the index will again break above a major downtrend line, which will open the way for more upside. Resistance levels are pegged at 1,640 and 1,680, and supports are at 1,550 and 1,520.
INVESTMENT STRATEGY
We recommend that investors accumulate shares in stocks that have strong growth stories and those that are expected to report good earnings results in second-quarter. Our stock picks for July are:
AOT (Buy, target 72 baht): Our target for the airport operator is based on discounted cash flow (DCF), assuming a weighted average cost of capital (WACC) of 7% and terminal growth of 4%. The stock retreated sharply in late June after investors digested the implications of the new Delta strain of the coronavirus. We expect the infection rate to peak in mid-July, and buying interest should return.
BCH (Buy, target 25 baht): The target price for the hospital group assumes a WACC of 7.1% and terminal growth of 2.5%, which is equivalent to 2021 price/earnings (PE) ratio of 26 times, below the sector's average of 38 times. BCH currently trades at a 2021 PE of 21 times, or -3.5 standard deviation (SD), while its peers trade at 38 times. A key catalyst is a strong second-quarter outlook with net profit expected to rise.
CKP (Buy, target 6.20 baht): The power producer's target price is based on DCF, assuming a WACC of 5.5% and no terminal growth value. Although the stock price is currently nearly fully valued, the Luang Prabang hydropower plant with a capacity of 1.5 Gigawatts, in which CKP holds a 42% stake, will add 1.70 baht to our target price.
EPG (Buy, target 15 baht): The polymer producer's target price is pegged to a full-year 2022 PE ratio of 27 times, or 1.0 SD above its five-year average. We see brighter earnings prospects with profit expected to hit record highs in 2022 and 2023 on expectations of economic recovery. The stock thus deserves to trade at its previous high of 15 baht.
NER (Buy, target 8.50 baht): The target price for the rubber producer is pegged to a 2021 PE of 9.0 times, or 1.0 SD above its three-year average. We predict earnings to record a series of new highs.
NYT (Buy, target 5.50 baht): The consensus target price for the warehouse and logistics provider implies a 2021 PE of 26 times. Based on the Bloomberg consensus, net profit is forecast to grow 18% year-on-year in 2021 and 32% in 2022 given the recovery in the global auto market. The Thai auto sector, as an export hub for vehicle and parts exports, stands to benefit.
PSL (Buy, target 24 baht): The dry bulk shipper's stock price has outperformed the SET Index by 20% over the past month and by 76% over three months, which we believe was due to global economic optimism. Freight rates are forecast to increase further in the third and fourth quarters during the harvest season. As of June 29, the benchmark Baltic Dry Index hit 2,921, while inflation may cause freight rates to decline.
