TIME TO CONCENTRATE ON DEFENSIVE SECTORS

Positive factors in October: Expect the cabinet to announce more stimulus spending packages this month in an attempt to spur more economic activity before the year-end. The cabinet has already accelerated work on 44 large-scale projects worth a combined 1.94 trillion baht and introduced the “Chim Shop Chai” programme to boost spending power and lend support to the tourism sector.

We also expect a breakthrough in US-China trade talks on Oct 10 and 11, as Beijing has resumed imports of US agricultural products, while US President Donald Trump has also hinted at a positive outcome.

Baht strengthening is also lending support to Thai equities. The country’s current account remains in surplus, which reflects healthy economic fundamentals.

Negative factors: The Thai economy remains weak overall. The Bank of Thailand has left its policy rate at 1.50% but cut its 2019 GDP growth forecast to 2.8% from 3.3%. Exports contracted 4% in August, chiefly due to the impact of US-China trade tensions. But the domestic economy is forecast to improve in the fourth quarter in light of government stimulus packages announced over the past two months.

Uncertainty about US rate cuts persists. While the market expects the US Federal Reserve to cut its key interest rate once or twice more between now and the end of 2020, the timing remains in doubt. The next Fed meeting is Oct 28-29.

TECHNICAL VIEW

In September, the SET index rode a roller coaster but traded within a narrow range of 1,620 to 1,679. Key resistance levels were 1,680 and 1,690. The index is likely to remain rangebound. A break above the downtrend line should open the way for a further upside towards 1,670 and 1,690. On the flip side, a failure to break through would cause the index to slide back towards 1,610 and 1,590.

As far as investment strategy goes, KTBST recommends increasing the weighting of defensive stocks to 30-40% of one’s investment portfolio in view of rising downside risk, as US-China trade talks may disappoint.

Among defensive stocks, consider safe-haven assets such as power plants and telecoms. Stocks that are expected to rebound after recent steep declines include banks and healthcare firms. Stocks that may rebound sharply include hotels and petrochemical and refinery operators should US-China trade talks reach a breakthrough.

STOCK PICKS

We expect the SET index to trade in a range of 1,610 to 1,690 in October. Our picks for the month are:

ADVANC. Our target price is 225 baht, based on a discounted cash flow (DCF) method, using a weighted average cost of capital (WACC) of 8.7% and terminal growth of 2%. A key catalyst will be an increase in data consumption by subscribers, but the upcoming 5G investment phase, which may lead to an intensified price war in the industry, will put a dent in earnings.

AOT. We have a Buy call on AOT and a target price of 80 baht based on DCF, using a WACC of 7% and terminal growth of 4%. Key catalysts will be rising tourist arrivals and a bid for the dutyfree shop at Don Mueang, on top of the airport operator’s strong long-term earnings growth outlook.

HMPRO. Our DCF-based target price is 18.70 baht, using a WACC of 7% and terminal growth of 3%, which is equivalent to a 2020 price-to-earnings (P/E) ratio of 35, or 0.25 standard deviations above the five-year average. Government stimulus spending and rising demand for repairs and air purification products will act as a catalyst to the share price. A key risk will be the opening of HomePro Mega Home, which may face tougher competition from online channels.

MTC. We have a Buy rating on MTC and a target price of 68 baht, which implies a 2020 price-to-book value (PBV) of 7.0, in line with the five-year average. We foresee a bright earnings outlook in the long term with an estimated compounded annual growth rate (CAGR) of 23% in 2018-20 and return on equity of 30% over the next two years. Key catalysts will be a lower cost of funds should the Bank of Thailand cut its policy rate further, in addition to the issuance of new debentures at a relatively lower coupon rate.

PTG. Our target price is 27.75 baht, which implies a 2020 P/E ratio of 25, or 0.5 standard deviations above the five-year average. Key catalysts are rising demand for biodiesel and a higher capacity utilisation rate of 100% in 2020.

TMB. We have a Buy call on TMB and a target price of 1.86 baht, which implies a PBV of 0.79, or 1.75 standard deviations below the five-year average.

"Among defensive stocks, consider safehaven assets such as power plants and telecoms.