The SET Index looks vulnerable to concerns about the transfer of political power and the coming Federal Reserve meeting. The index could plummet if investors lack confidence in the new government and if the Fed hikes its short-term rate at a faster pace than expected. Among factors affecting the market:
Local politics: The Election Commission has until mid-July to endorse the results of the May 14 polls, though many hope it will complete the process sooner to end the suspense. The Move Forward-led coalition continues with preparations to form a government but it could face a setback if a ruling on media share ownership goes against Move Forward leader Pita Limjaroenrat.
Foreign fund flows: Foreign investors were net sellers of 31 billion baht worth of Thai equities in May. If the transfer of political power goes ahead smoothly, we expect foreign funds to return to the Thai bourse.
Ukraine-Russia conflict: Prospects for a new Ukrainian offensive notwithstanding, the war has lately taken a back seat to global economic conditions. Nevertheless, any moves towards a peaceful settlement could provide support to the stock market.
Fed meeting: Investors are looking to the upcoming Federal Open Market Committee meeting on June 13-14. While investors expect the Fed to raise its key short-term rate by 25 basis points, a negative surprise might hurt global equities.
China's slowdown: Recent disappointing economic reports point to a further slowdown in China. Stocks tied to the world's second-largest economy may feel the impact.
A major downtrend scenario will likely remain intact, but we expect the index to trade sideways up with a potential to break above the upper end of the downtrend channel. If this occurs, we foresee a resistance level at the prior month's high of 1,576. But a break below the downtrend channel could open the way towards 1,478 or 1,460.
We recommend that investors stay on the sidelines until the new government is formed and then look to stocks that stand to benefit from the new government's policies. Growth stocks that have lagged their peers or the broader market are also attractive. Our stock picks in June:
- CPALL (Buy, target 75 baht): Our target for the retail giant is pegged to a 2023 price/earnings (PE) ratio of 35 times, or 0.25 standard deviation (SD) below the five-year average. Reduced financial expense in the wholesale business (MAKRO), stronger spending power on expectations that the new government will announce a stimulus package, and the post-pandemic boom in demand for leisure/business travel will play a role in propelling earnings growth.
- KTB (Buy, target 21 baht): Our target for the country's second-biggest bank is pegged to a 2023 price to book value (PBV) of 0.72 times (0.75 SD below the 10-year average). The shares currently trades at 0.67 times PBV, implying -1.0 SD. We believe the price has yet to reflect the bank's impressive first-quarter earnings performance, which exceeded the pre-Covid level when the share price reached a high of 21 baht.
- NYT (Buy, target 4.40 baht): Our target for the transport and logistics firm is pegged to a 2023 PE ratio of 20 times (1.0 SD below the five-year average). There is an upside to our target price given the outstanding first-quarter earnings performance amid bright prospects for the remainder of this year.
- PLUS (Buy, target 10 baht): Our target for the juice producer is pegged to a 2023 PE ratio of 27 times. While we forecast earnings to grow significantly in the second and third quarters on the back of seasonally stronger demand, the shares look undervalued compared to its peers' average PE level of 27 times.
- SEAFCO (Buy, target 5.20 baht): Expect an earnings turnaround for the first in three years for the contractor amid upside potential. We forecast 2023 core earnings to show to a profit of 131 million baht, while there is an upside to our gross profit assumption. Our research indicates a 50-basis-point increase in the gross profit margin will create a 6% upside to our earnings forecast. Our target is pegged to a 2023 PBV of 2.5 times (0.75 SD below the five-year average). The share price currently trades at -2 SD.
- SUN (Buy, target 9.50 baht): Our target for the food processor is pegged to a 2023 PE ratio of 18 times. Its valuation remains attractive, trading at 12.1 times PE, while we forecast a compound annual growth rate (CAGR) in earnings per share (EPS) of 78% in 2022-24. There is an upside to our earnings forecast as the Hydrolock machine will increase production capacity by 30%, while M&A activities and new market penetration could also help.
- TIDLOR (Buy, target 33 baht): Our target for the hire-purchase company is pegged to a 2023 PBV of 3.0 times (0.5 SD below the five-year average). We believe total loans outstanding will accelerate, and the cost of finance will increase at a slower pace as the Bank of Thailand is expected to keep its benchmark interest rate unchanged following the hike to 2% in May. The share price currently trades at an undemanding 2023 PBV of 2.5 times, which implies -1.0 SD.