Political developments and capital flow in positive direction
Executive Vice President / Research
Asia Plus Securities
After the framework for Thailand’s political developments became more certain, political pressure has eased. The new constitution is expected to take effect in mid-November or early December after the 90-day legal process. The next general election is estimated to take place in December 2017 or January 2018.
This week, announcements of listed companies’ second-quarter earnings should be followed.
As of the morning of August 11, about 178 listed companies, which accounted for 53 per cent of total market capitalisation, announced their performance with a combined 2Q16 net profit of Bt154 billion, up 4.9 per cent year on year and 7.5 per cent quarter on quarter. The results came out higher than expected partly because of to BLA’s (Bangkok Life Assurance) Bt9.5-billion reversed life policy reserve (liability adequacy test reserve).
If all listed companies announce combined earnings of no less than 1Q16’s Bt232 billion, it’s possible to see upward revision of their 2016 net-profit estimates.
Given lower political pressure and strong 2Q16 earnings performance, capital could flow into the Stock Exchange of Thailand consistently. From February 15 to August 11, foreign investors net-purchased Thai stocks worth Bt113 billion (three trading days after the referendum, net purchase at Bt15.7 billion) when the SET Index was at 1,450 points.
It seems that capital continues to gain momentum to move into the Thai bourse. It’s more possible for the SET Index to rise close to 1,590 points. At that level, the PER (price-to-earnings ratio) at year-end would be about 18 times, the highest since mid-2013, and remains a target for the SET Index at 2017 year-end, based on the market earning yield gap of 4.75 per cent.
However, risks have to be taken into account. Every time the SET Index rises, the market PER and investment risks heighten. Investors have to take more caution.
Stock picks: laggard stocks in terms of valuation compared with their industries – PS (Pruksa Real Estate), BH (Bumrungrad Hospital), BA (Bangkok Airways), CPF (Charoen Pokphand Foods) and MCS (MCS Steel).
After the second-quarter earnings announcements, a consensus on net-profit estimates and the SET Index target for this year and next could be revised up.
Meanwhile, investors should take more caution, as the SET Index has factored in recoveries of listed companies’ net profit. KS Research Department maintains its profit estimate at Bt890 billion or Bt92.8 per share and its year-end target for the SET Index of 1,530 points.
Take caution on risks to capital movement that could be volatile from late August to early September, given the increased likelihood of an interest-rate increase by the US Federal Reserve. The result of the August 17 meeting of the Federal Open Market Committee and the August 26 Fed annual meeting should be followed. These could make the US dollar volatile with rapid appreciation. Foreign capital that has come in to speculate on the baht could move back out.
In the short term, the SET Index will be driven by excess liquidity as a result of capital inflows and local investors, which could drive it to test 1,577 points. At this level, the expected PER (price-to-earnings ratio) is 17 times.
Since the beginning of this year, the SET Index has climbed more than 20 per cent, which boosted the market PER close to 17 times. There remains a risk of profit-taking.
Take caution on investment, particularly in stocks with prices exceeding their fundamental values or those with much higher valuations than their industries’ or the market. These stocks are highly sensitive and volatile. Given sharply higher liquidity in a few months, small caps or nano small caps could see high speculation. Be cautious with these.
Investment strategy: Focus on emergence of big and small infrastructure projects, acceleration of state budget disbursement and economic stimulus measures. Such factors will have positive impacts on domestic plays, particularly construction and construction materials – CK (Ch Karnchang), STEC (Sino-Thai Engineering and Construction) and SCC (Siam Cement) – and finance stocks – LIT (Lease It) – that could gain from expected state procurement.