The escalating Covid-19 outbreak will likely remain at centre stage in investors' calculations. We see the SET Index declining in August with a trading range between 1,480 and 1,570. Expect volatile trade with a trough in mid-August.
However, earnings are expected to come into play, particularly for stocks that are forecast to report strong second-quarter earnings growth.
On the plus side, the Thai government is expected to announce more measures to contain the spread of the virus and other financial assistance measures.
And as earnings reporting season continues, we see earnings plays taking the spotlight, particularly in stocks that have strong growth stories.
But the pandemic will continue to pressure the SET Index and the broader economy, while domestic political tensions might also affect market sentiment.
Most forecasters including the Bank of Thailand are continuing to cut their 2021 GDP outlooks. The central bank this week trimmed its growth prediction to just 0.7%. Another forecast suggested the economy would grow by 1.3%, down from a prediction of 2.3% earlier. This would reduce the aggregate 2021 net profit of the SET Index by 3-6%.
On the international front, the US Federal Reserve is sending more signals that it is ready to consider how to start scaling back quantitative easing, which has involved huge bond purchases of $120 billion a month to support the recovering economy. Given the uncertainty about its plans, the market looks likely to be volatile until the next Fed meeting on Sept 21-22.
The SET index is likely to remain on a downward trend. However, if the index finds support at 1,500 points, it may drift sideways. On the flip side, a break below the support would open the way for a deeper decline. We see support at 1,490 and 1,465 points and resistance at 1,545 and 1,570.
INVESTMENT STRATEGY
We would look to buy on weakness as the Covid situation will ease in the medium term. Attractive stocks are those with strong growth stories. Stock picks for August are:
- HTECH (not rated): Shares of the precision tool maker outperformed the SET Index by 41% over the past three months, which we believe was due to the strong first-quarter earnings performance. We see earnings over the course of the year rising further given a continued increase in component exports and the company's high chance to win contracts as a supplier to electric vehicle (EV) projects.
- KCE (Buy, target 90 baht): Our target price for the electronics firm is pegged to a 2022 price-earnings (PE) ratio of 32.0 times, or +1.5 standard deviation (SD) above its 5-year average. We see earnings riding an uptrend over the next few years in light of growing demand for electronic components, particularly from the EV segment.
- SMD (Buy, target 17 baht): As a provider of medical supplies, focusing on critical care equipment, the company stands to benefit from strong demand that is growing alongside rising Covi cases. The stock currently trades at a 2022 PE of 17.9 times, which is cheap compared to our earnings per share (EPS) growth forecast for a 34% compound annual growth rate (CAGR) from 2020-23.
- SUN (Buy, target 10 baht): Our target price is pegged to a 2022 PE of 19.6 times, or +0.75 SD above its 3-year average. Shares of the sweet corn maker currently trade at an attractive 2022 PE of 14.9 times, well below its peers' average of 18.4 times. We forecast EPS to grow by a CAGR of 30% from 2020-22, outnumbering its peers' average of 24%.
- TU (Buy, target 25 baht): Our target price for the seafood maker and exporter is pegged to a 2021 PE of 18.0 times, or -0.5 SD below its 6-year average. We see earnings growing further on the back of the new businesses, which are expected to provide higher profit margins and reduce risk from dependence on commodities.
- WICE (Buy, target 13.50 baht): Our target price for the logistics provider is pegged to 2021 PE of 25.0 times (close to its 5-year average). The stock currently trades at an undemanding 2021 PE of 19.4 times, implying -0.6 SD, and relatively cheap compared to its peers' average of 30 times. Profit is also projected to grow at a faster pace than its four peers (four companies) at 65% year-on-year.
- XO (Buy, target 26 baht): The target price for the food producer is pegged to a 2021 PE of 23.0 times (close to its 5-year average). The stock currently trades at an undemanding 2021 PE of 19.0 times, implying -0.5 SD, while EPS is projected to grow by a CAGR of 31.4% from 2020-22.
