Look for stocks that won't catch omicron bug

Look for stocks that won't catch omicron bug

The recent threat from the new omicron coronavirus variant is likely to pressure stock market sentiment. There is now a likelihood that the SET Index will reach just 1,650 by year-end, falling short of our earlier target of 1,680.

We would rather focus for now on stocks that rely on the domestic market and those that benefit from government and private investment, as well as spending stimulus measures.

On the external front, signals from the US Federal Reserve about an interest-rate increase by mid-2022 or sooner might dampen foreign fund inflows.

Among the positive factors for the SET has been an earnings recovery. Most listed firms reported better performance in the third quarter, as the domestic economy, consumer spending power and public/private investment all began to stir again.

Continued strong earnings growth and economic recovery could attract more foreign funds, reversing the current liquidity squeeze, but the omicron threat might prompt the government to reimpose restrictions, hurting sentiment.

Among other negative factors, oil prices bear watching as major consumers including the US, Japan and India release crude from their strategic reserves in order to bring down fuel prices that are feeding inflation.

The move was intended to force Opec and its allies to increase supplies, but the group said this week it would keep current production plans unchanged unless circumstances change.

DECEMBER OUTLOOK

The SET Index has traded sideways within the range of 1,591 and 1,685 points over the past three months. It was quite volatile in November, moving higher in the first half and testing the key 1,658 resistance before plummeting and breaking below the psychological support at 1,600 level in the final week.

The index is expected to retreat further this month and now looks looks likely to close a gap at 1,554 to 1,565, with the resistance level set at 1,600 and 1,630.

Given the current uncertain outlook, we recommend investing in stocks with strong growth stories and those with a potential to rebound in the aftermath of a new Covid outbreak. Our picks for December are:

- BCH (Buy, target 28 baht): The target is based on an expected weighted average cost of capital (WACC) of 7.1% and terminal growth of 3%. The hospital operator has experienced a continued increase in international customers in the quarter to date, implying stronger performance, particularly for its IVF and diabetic centres. The stock currently trades at a price/earnings (PE) ratio of 34 times expected 2022 earnings, which is -0.5 standard deviation (SD) below its five-year average and slightly above its peers' average of 33 times.

- COM7 (Buy, target 100 baht): The target is pegged to a 2022 core PE of 41 times or 3 SD above its three-year average. We forecast the IT product retailer's earnings per share (EPS) to grow at a compound annual growth rate (CAGR) of 42% in 2020-22 in light of strong demand, as well as a good response to its U-Fund instalment programme.

- DOHOME (Buy, target 33.50 baht): We forecast 2021 net profit to soar 180% to 2.03 billion baht as same-store sales are predicted to increase 18%. In the fourth quarter, we see earnings rising on the back of the relaxation of Covid curbs and the opening of two new home-improvement stores, with five more in the pipeline for 2022. Coupled with its effective product-mix strategy, net profit is projected to grow 11% next year to 2.25 billion baht. The shares now trade at 36 times expected 2022 earnings, compared to an average PE of 30 times for its peers. We believe a slowdown in third-quarter earnings was just a hiccup and foresee bright prospects for the long term.

- LEO (Buy, target 17 baht): We forecast the logistics company's 2021 net profit to surge 190% to 170 million baht on 2.87 billion in revenue, up 155%. In 2022, net profit is projected to increase a further 9% to 185 million baht, as an exclusive partnership with China Post boosts air freight and rail shipments. There is an upside to our forecast should the company achieve its revenue growth target of 20-25%.

- RS (Hold, target 18 baht): We forecast 2022 net profit to soar 156% to 576 million baht, close to pre-outbreak levels. The company continues to diversify beyond its media and entertainment base, and recently introduced a new high-margin pet food business, Lifemate, which aims to capture a 10% share of the market. Also noteworthy is the planned launch of the Popcoin token that can be used to purchase its products and those of its partners. Our Hold rating reflects a 2022 PE of 30 times, or -0.75 SD below its three-year average. The Popcoin token will trade on the Bitkub platform in early 2022, which we believe will create value-added to the RS supply chain and an upside to our earnings forecast in 2022-23.

- SNNP (Buy, target 15.50 baht): Pegged to PE of 31.7 times expected 2022 earnings, SNNP is our top pick in the food and beverage sector. Its valuation is attractive with a PE-to-growth ratio of 0.26 times based on our core profit estimate at a CAGR of 87% from 2020-23. As well, the company has an edge over its peers in terms of production cost, given its facilities both domestically and overseas. There is also a potential upside from hemp products in the pipeline.

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