Investors count on reopening and vaccines

The Thai stock market this week swung in a range between 1,530 and 1,570 points. The SET index slipped to 1,530 early in the week before staging a rebound in the middle of the week despite downward pressure from global risk assets, after Federal Reserve meeting minutes triggered worries that it would start to scale back its huge bond-buying stimulus programme.

Outlook: We expect the SET Index to consolidate around 1,550 points. Despite persistent high new coronavirus infections, economic reopening will likely gain positive momentum following the resumption of dine-in activities at restaurants in the hardest-hit provinces. We expect more relaxation of other activities after more widespread vaccinations start next month.

Market sentiment has also been bolstered by the year-on-year surge in the first-quarter aggregate bottom line of the SET, owing partly to the low base in the first quarter of last year. The low-base effect will continue into the second and third quarters, making for strong growth of 81% and 37% year-on-year, respectively.

Quarter-on-quarter earnings comparisons in the second quarter may not impress, however, given the impact of the third Covid-19 outbreak. Progress in distributing vaccines and, it is hoped, eventual control of the virus by the third quarter should generate confidence among investors during the second half about upside to the SET.

Our year-end market target of 1,605 points represents a 10% discount to our year-end 2022 target of 1,784, based on a price/earnings (PE) ratio of 18.2 times on market earnings per share (EPS) of 98 baht.

Positive factors: Aggregate first-quarter net earnings of the firms under Bualuang Securities’ coverage surged by 113% year-on-year and 41% quarter-on-quarter. Core profit rose 8% year-on-year and 31% quarter-on-quarter.

Of the 20 sectors under our coverage, 13 reported year-on-year bottom-line growth — most notably Construction Materials (higher sales, mean EBIT margin up 400 basis points year-on-year), Energy (higher oil prices), Chemicals (fatter product spreads), Electronics (31% year-on-year sales growth, fatter year-on-year margins), Insurance (higher revenue for TQM and higher return on investment for BLA), and Residential Property (transfers and margin expansion).

Aggregate net profit was 19% ahead of our estimate (and beat local analysts’ consensus forecasts by 17%), while core earnings were 8% above our expectation. Non-operational gains equalled 17% of core profit. (In the first quarter of 2020, non-recurring losses were equivalent to 41% of core earnings.)

Mean corporate gearing (excluding the financal sector) declined slightly quarter-on-quarter to 0.83 times, meaning equity base growth outpaced additional debt. The net gearing ratio was flat quarter-on-quarter at 0.61 times. Aggregate corporate debt rose 2.2% quarter-on-quarter, led by the Chemicals (heavier capital expenditure), Energy and Media sectors.

The market’s aggregate EBIT (earnings before interest and tax) margin expanded by 160 basis points quarter-on-quarter and 280 points year-on-year, supported by ongoing cost control programmes and higher revenues for some sectors. The aggregate first quarter EBIT/interest expense ratio improved quarter-on-quarter to 3.8 times, but was still far below the five-year mean of 4.9 times.

Second-quarter net profit after tax is forecast to jump 81% year-on-year but fall 11% from the previous quarter. We expect core profit to surge 95% year-on-year and inch up 3% quarter-on-quarter. The strong annualised gain reflects the low base set in the second quarter of 2020 when Covid restrictions were at their peak.

The sectors most likely to post strong year-on-year core profit growth are Energy and Chemicals (a low base was in 2020, fatter petrochemical spreads, higher product prices), Construction Materials (SCC will see growth across business units), Residential Property (higher transfers), Media (recovering revenue, effective cost controls), Consumer and Healthcare (a very low 2020 base). The Transport and Tourism sectors will (again) post aggregate losses for second quarter.

At the individual company level, we have identified 67 stocks under our coverage that should achieve year-on-year net profit growth for the second quarter.

Among the negative factors, note that local brokerages so far this month have announced 2021 earnings forecast downgrades for 32% of the companies they cover, with upgrades for 29%. It was the first time in five months that downgrades had exceeded upgrades, reflecting perceptions that the third Covid wave will materially dampen the economic recovery.

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