Look for equities with strong growth stories

Thai market sentiment appears positive as the pace of new Covid-19 cases is likely to tilt to the downside following a steady increase that lasted nearly five months.

And while the US Federal Reserve has signalled that it will start to scale back its huge stimulus soon, we do not expect a significant impact as investors have been anticipating such a move, although the continuing surge in Delta coronavirus cases in the US and elsewhere could affect the timing.

Key factors expected to influence stock market direction in the near term will be the number of Covid cases, the Fed meeting on Sept 21-22, and speculation about third-quarter corporate earnings.

If the pace of new Covid cases continues to slow down, we expect more investors to return to the market. Some lockdown restrictions have already been eased, and a further improvement could convince the government to relax entry regulations for vaccinated visitors from abroad, which would be a big lift for the economy.

Negative factors include continuing street protests calling for the ouster of Prime Minister Prayut Chan-o-cha. We do not expect a significant impact on the Thai bourse, although the protests, the no-confidence debate and the continuing drama over amendment of the constitution may spoil sentiment.

For September, we see the SET index breaking above the previous high of 1,642 with a potential upside towards 1,680 and 1,700. The moving average convergence divergence (MACD) in the monthly chart points to the upside, though several gaps exist along the way that might slow the rise. But if the index fails to break through 1,642, it will pull back to drift within the previous sideways channel between 1,501 and 1,642, the range we have seen over the past six months.

INVESTMENT STRATEGY

Stocks that stand to benefit from an easing of Covid restrictions and those with strong growth stories are attractive. Bear in mind, though, that stocks that have gained sharply recently could come under selling pressure. Our stock picks for September include:

COM7 (Buy, target 96 baht): Our target for the IT retailer is pegged to a 2022 price/earnings (PE) ratio of 42 times, or +3 standard deviations (SD) above its five-year average. We foresee strong earnings growth potential over the next couple of years as sales from the non-credit card group, providing a relatively higher profit margin, should increase to 25% of total sales, and the further rollout of 5G services should boost Internet of Things demand.

GULF (Buy, target 44 baht): We forecast core profit to soar 84% year-on-year to 8.7 billion baht in 2021 and a further 64% to 14 billion in 2022. The contribution from INTUCH and the start of commercial operations at more of its power plants will be key growth drivers. The company might also seek to build on its indirect shareholding in the country's top mobile operator AIS through its 42% shareholding in INTUCH. For now, GULF says it has a plan for asset optimisation to boost dividend income.

IP (Buy, target 23.87 baht): Our target is based on Bloomberg consensus earnings forecasts and strong growth potential for the biopharmaceutical and healthcare company in the foreseeable future. In addition to economies of scale, revenue contributions from Modern Pharma for the whole year and Teva Pharma, which was acquired in the first half of 2021, will be a game-changer. Additionally, the company has many vacant agricultural land plots that should enable it to expand its production capacity.

LEO (Buy, target 16 baht): Our target for the logistics provider is pegged to 2022 PE of 30 times. The stock currently trades at a PE of 25.8 times, which is cheap given our estimate of a 49% compound annual growth rate (CAGR) in net profit from 2020-23.

PTTGC (Buy, target 85 baht): Our target for the petrochemical arm of PTT Plc is pegged to a 2021 price to book value (PBV) of 1.25 times, or 0.75 SD above its five-year average. While there is upside potential from the acquisition of the European resin coatings producer Allnex, we see second-half core profit growing year-on-year, as world oil prices remain strong and polyethylene prices are high given strong demand.

SAWAD (Hold, target 67 baht): Our target is pegged to a 2021 PBV of 3.8 times, or -0.75 SD below its five-year average. The financial services company has strong growth potential with 2021 earnings likely to overtake our forecast as loans have gradually increased given the economic recovery and relatively modest impact from the Covid outbreak on its operations.