August was good to the Stock Exchange of Thailand with the index moving up 62.52 points, or 4% month-on-month, to close at 1,638.93 points. Average daily turnover improved significantly, climbing 21% to 70.7 billion baht, from only 58.3 billion in July.
Foreign investors were the key market movers for August with a net-buy position of 57.3 billion baht. Local funds were net sellers of 19.2 billion baht and local retail investors sold 34.2 billion baht worth of shares.
The SET rode a wave of positive sentiment throughout the month with better-than-expected second-quarter earnings by listed companies, the baht strengthening against the US dollar to its best in seven weeks, huge foreign net buys, and the Bank of Thailand finally raising interest rates.
Later in the month, however, heightened concerns about inflation in Europe and more hawkish comments from the US Federal Reserve indicating it would rein in inflation at any cost dampened SET sentiment.
Aggregate earnings per share (EPS) of listed companies in the index were 29.10 baht for second quarter, increasing 20.7% year-on-year and 34.7% from the previous quarter. This marked the highest EPS level since the first quarter of 2018. The key driver of the good results was a smaller loss than previously anticipated. Although the baht weakened considerably in the second quarter, foreign-exchange losses shrank.
Meanwhile, the energy sector reported huge stock gains in the second quarter and thus saw the biggest growth by sector. The weak baht also allowed exporters to enjoy profits that were much better than previously expected, in particular the electronics and food sectors.
The baht strengthened in the first half of August to almost 35 per dollar from its peak of 36.95 in mid-July. However, it has weakened once again, reaching 36.70 already this month.
Inflation in Thailand, meanwhile, edged up slightly to 7.9% for August from 7.6% in July. We expect another high inflation reading in September before pulling back to 6-7% in the fourth quarter and 2-3% in 2023. In e crude oil market, West Texas Intermediate has corrected to below $90 per barrel.
QUIET SEPTEMBER
September could prove to be a month in which the SET stays in a somewhat narrow channel. While we believe the SET has already bottomed out, we don't expect the index to take off until the fourth quarter and see a year-end target of 1,720.
Market catalysts include an oil price at around $90 per barrel, the central bank increasing interest rates at its next two meetings, foreign fund inflows continuing, tourist arrivals continuing to top 1 million per month, and potential spending outlays related to the general election that must be held next year.
On the last point, we note that the election should take place in the second quarter of 2023 and that we usually see an election-related rally kick off on the stock market around six months in advance of the vote. As such, we expect positive sentiment for the SET late this year.
We now recommend an accumulation strategy in which stocks account for up to 80% of an investment portfolio. Our picks are AOT, CENTEL, CK, SCB and TFG.
Inbound international tourists increased significantly to over 1 million in both July and August, boding well for industries related to tourism in Thailand. As the country's main airport operator, AOT is the first stock we think of on when tourism picks up. We expect 2 million arrivals in December alone and up to 22 million in total next year -- more than half the pre-pandemic record of 40 million in 2019. Though we project a net loss for AOT this year, the clouds are parting, and it should turn a solid profit of 10 billion baht in 2023.
Another top pick that will be a beneficiary of the tourism recovery is CENTEL. The hotel and restaurant operator already turned a net profit in the second quarter after suffering since the pandemic began. In fact, management says the hotel business is now stronger than in 2019. This indicates that CENTEL should continue to generate profit in the second half of 2022 and next year. We project 2023 earnings of 2.1 billion baht, up 222% from this year.
CONSTRUCTION REVIVAL
With post-pandemic normalisation accelerating, construction of many projects has resumed, benefiting the contractor CK, our top pick in the construction space. Although CK's second-quarter profit dropped slightly, we project a fast recovery in the second half and 76% profit growth next year. The company now has a hefty backlog of almost 60 billion baht worth of projects. It also stands to receive dividends from its holdings in TTW and BEM. Backed by improved operations at its subsidiaries, the fundamentals of CK should remain strong.
In the banking space, SCB's outlook has been improving in the eyes of investors since it cancelled its planned purchase of Bitkub Online. As the cryptocurrency market has been highly volatile this year with the price of many coins declining, investors saw the deal as risky for SCB. Supported by the rising interest rate environment and improving economic conditions, we believe the bank will grow at a steady 11-13% per year for the next two years. We also highlight that SCB is planning to list a number of its subsidiaries, enhancing its future value.
In the food sector, smaller-cap TFG has been one of our favourite stocks this year. The company has been growing strongly on the back of increasing pork and chicken prices and has also benefited from baht weakness. We project a massive 700% profit surge this year, before slowing next year, and consider the current share price still very attractive with a price/earnings ratio at less than 10 times expected 2023 earnings.
