Cautious rebound as earnings season begins


Thai shares rebounded this week after the government imposed new Covid lockdown measures, rising from the support at 1,540 points to reach 1,580. Outperformers have included financial plays and solution providers that BLS Research recommended earlier. Oil and gas and refinery shares underperformed amid signs that Opec and its allies would go ahead with supply increases after an earlier disagreement, in line with our warning previously.

We expect the SET Index to move sideways and consolidate between 1,560 and 1,600 points in the near term in light of clarity about US Federal reserve policy. In testimony before a Senate committee this week, Fed Chairman Jerome Powell said the central bank would not rush to hike interest rates despite the current inflation spike.

Mr Powell also reiterated that the Fed would maintain accommodative monetary policy until the US economy fully recovers. That includes maintaining current high volumes of bond buying, or quantitative easing.

As earnings reporting season gets under way, we expect the aggregate second-quarter net profit of the SET to jump 98% from its low base last year, but to slip 5% from the first quarter. Core earnings should surge 89% year-on-year but will be flat quarter-on-quarter.

The sectors most likely to post strong year-on-year and quarter-on-quarter core profit growth are Chemicals (greater sales volume and fatter product spreads); Energy (Brent crude prices have doubled from a year ago and gross refining margins averaged $2 per barrel in the second quarter versus $1.40 in the second quarter of 2020); Healthcare (higher revenue from Covid-related services on top of stronger domestic demand); Property (more transfers by residential developers and industrial estate operators); Shipping (higher dry bulk freight rates, up 350% year-on-year and 80% quarter-on-quarter).

Our preliminary third-quarter model points to 44% year-on-year growth in SET core profit and a 5% quarterly gain. We see aggregate net profit rising 35% from a year ago but falling 9% quarter-on-quarter.

We expect 12 sectors to post year-on-year core profit growth (against 13 in the second quarter). They include Chemicals and Oil & Gas (higher product prices and fatter spreads), Healthcare (higher revenue from domestic patients, partly related to Covid), Media (higher revenue), Packaging (stronger demand), and Industrial Estates (higher transfers).

Upgrades in consensus forecasts for earnings per share (EPS) have slowed in recent months, with the number of sectors subject to upgrades slipping below the number subject to downgrades. The blowout in Covid infections in June and July (and the tough measures imposed in an effort to contain the outbreak) precipitated earnings forecast downgrades for operators of restaurants, transport and tourism businesses, and for some stocks in the retail sector.

In contrast, oil and gas and chemical firms are still seeing projection upgrades, due to high crude prices and wider than expected petrochemical spreads. Progress in rolling out Covid vaccines in the second half should prompt broader upgrades to profit forecasts later this year. Our EPS forecasts for the SET are 83 baht for 2021 (the consensus is 84.30) and 98 baht for 2022 (the street projection is 96.20).

The high number of local coronavirus infections remains the key risk to monitor, along with the government response, assistance measures and general political stability.

The prospect of a crude price war also bears watching as the Opec+ alliance starts lifting production. Some members may seek to pump more than their quota to win market share and earn revenue. Lower crude prices could drag down oil and gas and related stocks, which would pressure the energy-heavy benchmark SET index.



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