Investment themes turn more towards cyclical plays
March has started out with very good news. Vaccine distribution is now under way in Thailand, with more than 30,000 people vaccinated so far. This comes not a second too soon as the lockdown during the first two months of the year had dragged the economy back down.
We should now see the recovery gain steam as vaccinations accelerate. The vaccine plan for Thailand calls for 2 million doses within April, another 26 million by August, and 35 million more by the end of the year. This positive news has catalysed a big SET gain this month with huge trading turnover of around 100 billion baht per day.
The index is now at a new high for the year, approaching 1,580 points, and continued momentum could take us to 1,600 before the end of the month.
Worldwide, daily new cases have continued to decline and are now around 300,000, a huge drop from over 700,000 per day at the beginning of the year. Covid deaths have fallen from almost 15,000 per day in early 2021 to around 6,000 now.
One of the big stories in the finance world as of late is the bond market. The yield for US 10-year Treasuries continues to rise and is now at 1.6%, significantly affecting equity markets worldwide. We have seen tech stocks drop rapidly, while growth stocks, on which many mutual funds have been betting, have also declined significantly.
FOREIGN FUNDS RETURN
Foreign investors pulled funds from the SET over the first two months of the year, with net selling at more than 29 billion baht. However, in response to the start of vaccinations in Thailand, fund inflows have reached almost 9 billion baht for the first 10 days in March.
We believe bond yields should peak soon, as fund inflows should continue into the equity market for now. With all earnings results for 2020 already announced, investor focus is shifting to recovery plays and we see the market building a positive trend for at least the short term.
Moreover, the government has launched another 37 billion baht in new aid packages to counter the pandemic impact, and expects to distribute the funds to more than 9 million people. Meanwhile, a new tourism initiative in Phuket calls for tourists who arrive on the island to quarantine themselves on their hotel grounds before travelling around the country. If this succeeds, we expect other tourism-focused provinces to follow suit with similar programmes.
Given the aforementioned factors, we believe investment themes will turn more towards cyclical plays. At current valuation levels, our top picks — BDMS, EASTW, SCC and TOP — are composed mainly of stocks with strong fundamentals and solid dividends.
First, we look at healthcare. Vaccine distribution will improve the performance of most hospitals as Covid fears and social distancing kept patient traffic quite low last year, including for BDMS.
Though the company’s recent earnings results were slightly below our forecasts, we believe that starting from the first quarter of 2021, operations will start to improve and culminate in solid 23% earnings growth for 2021.
EASTW, a major water distributor on the east coast, including industrial estates, also had a bad 2020, hurt by reduced water usage amid the lockdowns. For 2021, however, we anticipate normalisation leading to profit growth of 37% year-on-year, a quick return to the 2019 level.
Moreover, the company’s new pricing structure for its industrial user water supply will see prices increase by 4% on average. This is important as industrial users account for 65% of EASTW’s revenue. The company has also increased its dividend payout ratio to 87% of earnings per share for last year’s operations. We project a dividend yield of more than 4% per year for EASTW going forward.
REVIVAL FOR SCC
SCC, one of Thailand’s biggest conglomerates, should benefit from the economic recovery and the diversification of its businesses. The company’s 2020 earnings were slightly disappointing from investment losses in Myanmar and Indonesia — but these should be one-off events.
We expect SCC’s overall operations to normalise this year. Its chemical business group should be particularly strong on higher demand from the electrical appliance industry and ramp up use of PVC in construction worldwide.
However, new supply from China and the US should offset some of the benefits. With a share price currently weak and dividend yield at almost 4%, we believe the time is ripe to invest in SCC.
Finally, we turn to TOP, our top pick in the energy sector. The company made a significant loss last year, even as it sold GPSC shares worth more than 5.8 billion baht. 2021 looks much better for the refiner and we project a big profit from improving oil prices and utilisation rates.
Operational improvement was already evident in the fourth quarter of 2020 when its gross refining margin came in positive at US$1.20 per barrel, compared with minus $1.10 in the third quarter.
The rising oil price also stands to help its earnings via stock gains this year. All things considered, we see a good opportunity to invest in the oil refinery business now.