DOWNWARD REVISIONS REFLECT ECONOMIC TREND

Overwhelmed by concerns about the economic outlook and profit taking, the SET touched a nine-month low on Oct 25, closing at 1,593.28 points. Many large-cap stocks hit multi-year lows, especially in the banking sector.

However, the SET subsequently staged a rebound in early November, reaching almost 1,630 points. The somewhat unexpected rally was driven by improved sentiment about the China-US trade talks, oil prices moving up and Japan-based Rating and Investment Information (R&I) upgrading Thailand’s rating from BBB+ to A-.

We now find ourselves in the middle of a lacklustre third-quarter earnings season, with previews and results pointing to weaker-than-expected figures. While our current 2019 earnings per share (EPS) forecast for the SET is 100 baht, up 3.9% year-on-year, it could come down by 2-3% if results continue to miss expectations.

Should that occur, 2019 would likely mark the second straight year of no growth, after a 3.4% decline to 96.30 baht in the SET EPS last year. Revisions to 2019 would likely include changes to our current forecast of 114.70 baht for 2020 as well. In such a case, our forecast EPS could fall to between 105 and 107 baht, representing 8-10% growth from this year.

While the 2020 figure looks stronger, we caution that both 2018 and 2019 started with forecasts for 8-10% EPS growth. We also note that such growth could be difficult given that forecasts indicate slower global economic expansion in 2020.

Our previous base case was predicated on overall sentiment shifting from neutral to slightly positive towards the end of this year, driven by higher long-term investment fund (LTF) flows. This is because 2019 is the last year for investing in LTFs to capture tax savings. A new tax-saving vehicle is to be established next year.

We had expected fund flows into the SET, including for retirement mutual funds (RMFs), to reach 50 billion baht, pushing the index beyond 1,700 points. However, with the SET closing below 1,600 recently, we have adopted a more bearish view and expect the index to peak at 1,680 this year.

On the plus side, liquidity in the market remains abundant and measures taken by central banks should help fund flows into the Thai market later this year. For example, the European Central Bank has announced a quantitative easing (QE) programme amounting to €20 billion per month starting this month, while the Bank of Japan is maintaining its QE commitments of ¥80 trillion per year. We also expect upgrades from ratings firms, from stable to positive, to encourage investment flows into the SET.

Our current top picks are AOT, BEM, CPALL and SCB. For AOT, we expect earnings for its fiscal fourth quarter ending Sept 30 to come in at 5.9 billion baht, up 11% year-on-year but down 5% from the previous quarter. This excludes extra items, namely provisioning, of 710 million baht. Including the provisioning, net profit should be 5.2 billion baht, down 4% yearon-year and 12% sequentially.

While the airport operator’s results may look unexciting, we note that tourist arrivals jumped 11.7% year-on-year during Oct 1-19, the period that included the Chinese “Golden Week” holidays. We expect this arrivals uptrend to carry into November and December. Sentiment for AOT should also find support from the expected opening of bidding for a new duty-free concession for Don Mueang airport later this year and pickup services in 2020.

For BEM, our positive view is underpinned by the extension of the Blue Line, expected to be completed within 2020, as it should increase daily ridership from 320,000 to 500,000 passengers. The extension should help BEM generate a threeyear compound annual growth rate of 28% in net profit. We also expect the company’s expressway contract, which ends in February 2020, to be extended by the end of this year, and we anticipate additional gains from the three-airport high-speed rail project.

CPALL, meanwhile, continues the steady growth of its 7-Eleven outlets, expecting to add another 700 branches this year for a total of 11,600. The company is also in the process of obtaining licences to expand into Cambodia and Laos. In terms of products, the company’s focus is now on personal care and ready-to-eat food, both of which offer higher margins. This should help lift net profit by 8.4% this year and 18.8% next year.

In the banking sector, we believe SCB’s share price has plunged more in recent weeks than its fundamentals suggest is fair. Although concern about lower fee income and increasing non-performing loans will continue to haunt banks for some time, the Bank of Thailand’s recent policy rate cut to 1.25% from 1.50% should serve as a catalyst for the banking sector.

Finally, the inclusion of CPALL and SCB in LTFs means that they should benefit from expected fund flows into these investment vehicles over the final two months of the year.

If corporate results continue to miss expectations, 2019 could mark the second straight year of no growth in SET earnings per share.