SET Index likely to remain in the grip of significant downside risk

SET Index likely to remain in the grip of significant downside risk

Therdsak Thaveeteeratham

Executive vice president /research department

Asia Plus Group Holding Securities

Previously, the Thai stock market traded at the price to earnings ratio (PER) of higher than 18 times (sometimes above 20 times), which was irregularly high, while there remained no major supportive factors like positive news for fundamentals or a large amount of capital flow. Then, the SET Index made corrections. Since February 16, the SET Index has dropped more than 120 points. As there may be no new positive factors, this week may see market correction with lower downside risks.

When the SET Index goes through market corrections for a while, at a point, investors who expect returns on investment for the long term should buy to gain returns that are worth investing at this level of risk. We estimate the Thai stock market’s fair value at the PER of 16 times. This year’s earnings per share (EPS) is forecast at Bt103. The SET Index is projected at 1,650 points at the year-end. If investors demand 10 per cent returns on stock holdings, they should buy at 10 per cent discount from the targeted prices or at the SET Index of 1,485 points. Another view is that at the year-end, the SET Index is forced to be traded at the PER of 14 times, which is lower than the level it should be at, or 1,442 points. Accumulate stocks at the SET Index of 1,442-1,485 points.

There remains a downward risk for this year’s gross domestic product (GDP) growth for follow-up. Earlier, several agencies cut their growth estimates for 2015. The Fiscal Policy Office slashed its 2015 growth projection from 4.1 per cent to 3.9 per cent in January. On March 20, the Bank of Thailand cut its 2015 GDP growth forecast from 4 per cent to 3.8 per cent. Recently, the Asian Development Bank revised down its estimate for Thailand’s 2015 growth from 3.9 per cent to 3.6 per cent. Thai export growth estimate is seeing the highest cut to 1.2 per cent this year, compared to the earlier expected figure of 3-4 per cent.

ASP Research expects to cut its forecast for this year’s GDP growth from 3.5 per cent to 2.5-3 per cent. There is a low risk for cuts of Thai-listed companies’ EPS growth. Presently, the EPS is expected to rise 35 per cent this year, given last year’s much-lower-than-normal profit base. It is possible for a cut of about 1 per cent. Every 25 basis point cut will lead to commercial banks’ profit dropping by 0.67 per cent or about Bt1.5 billion. In the oil business, every US$5 drop in the oil price (based on the Dubai crude price of $75 per barrel) will lead to a Bt11-billion drop in profit, which is not much. However, it could fuel pressure for trading environment.

Focus on stocks with sound fundamentals, high EPS growth and dividend payment. Stock picks: STPI (fair value @Bt23.64), Vanachai Group (VNG @Bt10.25) and MCS Steel (MCS @Bt9.19).

Kitpon PripisankitEquity analyst & strategist

Kasikorn Securities Co Ltd

Following a cut in this year’s GDP growth projection from 4 per cent to 3.8 per cent, the Thai stock market confronted consistent profit-taking, particularly after the announcement of February’s 6.1 per cent export drop for the second consecutive month. The slow economic recovery heightens the economic downside risk and that affects recovery of domestic consumption and raises the risk of cuts for listed companies’ profit estimates.

We’ve seen drops in prices of most stocks that rely on the domestic economy. Stocks that depend on external factors like energy ones have witnessed lower drops in prices, while gaining short-term support from crude price rebounds due to the conflict in Yemen. Yemen, despite its low crude production, is a route for transportation of 4 per cent of the global crude we consume per day. However, we expect it to be a short-term recovery, as oil production tends to continue and peak in May 2015. The crude price is expected to stabilise after that period. Be cautious about speculation in the energy and petrochemical groups. Some energy stocks are attractive and could be accumulated. They are Bangchak Petroleum (BCP), Thai Oil Products (TOP) and BANPU.

Key factors: 1) Announcement of the US GDP for the fourth quarter of 2014 on March 27; 2) Funds’ switching through lock sales of high capital gains stocks and purchase of underperforming stocks. Likely window dressing in late March; 3) Thai economic figures on March 31; and 4) China’s purchase managers’ index on April 1.

Investment strategy: The stock market has become weaker than expected, dropping below 1,500 points. Although a short-term rebound could follow, there remains significant rise in downward risk to 1,440 points. Hold 30 per cent of portfolios as cash to cope with such risk. Speculation for short-term trading with stop loss.

Stock picks: BCP, TOP, BANPU, Siamgas and Petrochemicals (SGP), Malee Sampran (MALEE), SC Asset (SC), Ratchaburi Electricity Generating Holding (RATCH), Electricity Generating Public Company (EGCO), Krungthai Bank (KTB)

Technical speculative picks: Nation Multimedia Group (NMG), EMC, Mega Lifesciences (MEGA) (stop loss at 3-5 per cent from purchase prices)