The Thai stock market has become more robust over the past three weeks following the introduction of an uptick rule that has helped tighten control over short-selling and reduced volatility.
Short-selling transactions on average were lighter than in the previous month and rapid declines in individual stock prices were less severe than in the first half of this year. However, this might not apply to some stocks with specific factors beyond fundamentals, such as Energy Absolute (EA), which has been rocked by fraud charges levelled against its former CEO and deputy CEO by the Securities and Exchange Commission.
EA was already facing questions about its financial stability, which in turn led to worries about provisioning and loan reclassification in the banking sector, though this has not materialised yet.
However, the overall market did not fall sharply, as it might have done in response to such an incident in the past. Moreover, sentiment was lifted by big news about the planned amalgamation of GULF and INTUCH, which drove shares within the group including GULF, INTUCH, ADVANC and THCOM.
In the coming week, investors will focus on corporate earnings as banks will finish announcing their results and the market focus will turn to the real sector. Major conglomerates such as companies in the PTT and SCG groups will likely release their earnings by the end of July, while the remainder should be concentrated in the Aug 6-15 period.
We believe investors will focus more on stocks with potential to deliver positive earnings surprises rather than those with earnings warnings or the potential to post worse-than-expected results, because it is now more difficult to go short on their shares.
On the political front, investors will be watching the Constitutional Court on Wednesday to see whether it sets a date for a ruling on the ethics case filed by former senators against the prime minister. The president of the court signalled earlier that the case would probably be concluded by September, implying that political factors might not weigh much during late July and early August.
Therefore, the focus will likely be on budget issues. We expect the SET Index to move in a sideways-up pattern towards the 1,320-1,340 range to sustain the recovery momentum.
POSITIVE FACTORS
On the earnings front, we estimate that aggregate second-quarter net profit of listed firms will grow 27% year-on-year and 2% quarter-on-quarter, helped by an economic recovery, inventory gains by oil firms, and higher domestic and overseas meat prices buoying food exporters.
Excluding extra items and the big-cap energy/petrochemical sectors, earnings of the remaining sectors are expected to grow 11% year-on-year and 4% quarter-on-quarter.
Sectors that will likely deliver outstanding profit growth year-on-year include: food and beverages (higher meat prices, solid demand growth for functional and energy drinks as well as pet food); information and communication technology (better mobile and broadband revenues); transport (traffic improvement); power (lower gas and coal costs for small power producers and new capacity of independent producers); and industrial estates (more land transfers, higher land prices).
Among individual stocks that will likely post outstanding results are COCOCO, OSP and ITC (food and beverages), AMATA (industrial estates), GULF (power), KCE (electronics), CPALL (retail), and ADVANC and INTUCH (ICT).
Another supportive factor will be interim dividend payments, to be announced after results are released, though banks may lag a bit. We expect 23 stocks under Bualuang Securities' coverage to offer a yield of more than 2% for interim dividends, based on their July 17 closing prices. Among them are banks (TTB at 3.6%, KTB 3%, BBL 2.7%), power (WHAUP 3.7%), property (SIRI 4.2%), ICT (ADVANC 2.2%) and industrial estates (WHA 2.2%).
We have screened further to identify three stocks that meet the following criteria:
- Decent dividend yield (both interim and full-year);
- Consistent dividend payments (every year during the past three years);
- Yearly average dividends (five-year average) above 2% inflation;
- Top/bottom lines in the previous quarter did not fall short of expectations;
- Momentum for profit and/or revenue upgrades during the past 1-3 months;
- Further upside potential for valuations, and
- Supportive factors in the second half, such as greater power demand at industrial estates, synergy from GULF-INTUCH amalgamation, continuous growth in demand for energy drinks.
- Based on all of the above, our three top picks are WHAUP 3.7% (power), ADVANC at 2.2% (ICT) and OSP at 2.3% (beverages).
- Among negative factors that could affect the market, domestic factors include:
- Forced sales of individual stocks, particularly those with margin accounts, which will continue to undermine confidence in an uptrend;
- Political overhang: The market anticipates clarity by August on both the PM's case and the dissolution case against Move Forward Party, with the ruling on the latter due on Aug 7;
- Unresolved household debt, which will bring renewed worries during earnings announcements of banks and financial companies.
On the external front, we could start to detect initial recession warning sigs from a US consumption slowdown, a weakening job market and the shifting tone of rate-cut signals from the Federal Reserve. As well, as the US presidential race heats up, expect more discussion about international politics.
