Post-containment investment strategy

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The month of September was a general surprise as the SET index moved between 1,600 and 1,650 points and reached its peak of the year at 1,658.08 at the start of the month. Average turnover increased significantly to over 92 billion baht per day and foreign investors returned as net buyers of 11 billion baht, in stark contrast to net sales of 88 billion baht. for the first eight months of the year.

Positive momentum is building in Thailand with relaxed closures, with department stores and most businesses allowed to reopen last month. The restaurants are open but with certain limitations, such as occupancy limits. Cinemas and fitness centers have also resumed their activities.

In general, sentiment is much better with the economy emerging from the nearly two-month lockdown. The easing of restrictions has coincided with a gradual decline in Covid cases since early September. New daily cases have been below 10,000 for several days now, and daily deaths have fallen to around 100 from a peak of 300 in July. On the vaccination front, nearly 34 million people have received their first vaccine and about 22 million or 31% of the population are fully vaccinated.

As domestic sentiment improves, external factors further darken the investment environment. One of the most important is the US Federal Reserve, which provided hawkish guidance on the interest rate environment and reducing its asset purchases at its meeting in late September. This has cast a veil on stock markets around the world, including Thailand. Bond yields are now rising significantly, with the 10-year US Treasury yield remaining above 1.5%.

Nonetheless, the overall pandemic situation has improved and most countries are on the path to normalization, although “normal new measures”, such as social distancing, remain intact.

Amid the reopening and renewed demand for travel, crude oil is gaining a lot of attention, with the price of West Texas Intermediate now hitting $ 80 a barrel after starting the year at less than $ 50. This could be one of the factors depressing the investment environment in the fourth quarter.

MIXED RESULTS

Given Thailand’s lockdowns in July and August, we believe third quarter results, which will be released from next week, will show quarter-over-quarter declines. YoY performance should however strengthen as activity is much better this year and oil prices have risen significantly, helping SET, a big energy consumer. We also expect banks to cut loan loss provisions after the huge extra items last year.

Our investment theme for the month is to accumulate stocks of companies that have been penalized by the depressed investment environment.

As weak expected third quarter results and a hawkish Fed weigh on SET, we think investors are increasingly looking forward to the recovery theme as all businesses will be almost fully open in October. As such, we are looking for laggards who are likely to recover in the short term. Our current choices are BBL, JWD, SFLEX and SPRC.

On the banking side, BBL is expected to see a slight decline in quarter-over-quarter earnings due to reduced activities during lockdowns and debt restructuring. However, we expect operations to recover quickly in the fourth quarter following the removal of foreclosure restrictions and the Bank of Thailand’s decision to relax debt consolidation regulations for various banks.

As BBL loans are mainly devoted to housing and therefore carry low interest rates, the bank should benefit from this mechanism. With the extensive restructuring announced by SCB, banks in general are being targeted for investment. In terms of valuation, we also appreciate BBL as a laggard in the sector.

In logistics, we continue to love JWD. The company’s quarterly profits are still expected to be strong as lockdowns did not reduce transportation and logistics in the third quarter. In addition, the company has made investments in businesses related to healthcare and e-commerce. We expect both of these sectors to continue to generate high growth even after the pandemic has ended. We estimate JWD’s profit growth to be 50% this year and 46% in 2022, thanks to new investments and steady growth in the logistics industry.

PACKAGING POWER

We also love SFLEX because the second half of the year tends to be peak season for the packaging industry. SFLEX offers products for the food and medical equipment industries, which generate much higher margins than other packaging product segments. The company is also building a new factory to separate the food and medical equipment branches from each other. It will improve the production process of the high margin products and increase the overall capacity.

SFLEX recently announced a joint venture with seafood giant TU to create a flexible packaging production company. This is a good sign because it shows that the company can block demand from large companies and improve its packaging products in the long run.

Among refineries, we currently prefer SPRC. As mentioned earlier, WTI prices hit their highest level in two years. All refineries should therefore benefit from higher margins and inventory gains. We see SPRC as a top choice because it benefits from the economic recovery as well as increased gasoline production. SPRC’s margin is also higher than that of its competitors. Thus, we believe the company is expected to record a sharp increase in profits this year to over 3.1 billion baht after recording a large loss last year.


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