THAI­LAND’S BEST SMALL-CAP GEMS

Bangkok Post - - NATIONAL - Sun­thorn Thongthip is the se­nior vice-pres­i­dent of Kasikorn Se­cu­ri­ties Plc. SUN­THORN THONGTHIP

We be­lieve small-cap stocks will out­per­form large caps in the post-Covid re­cov­ery phase for two rea­sons. First, small caps were hit harder dur­ing the cri­sis sell-off. Sec­ond, as a riskier area of the mar­ket, they of­ten per­form well in an up­cy­cle led by risk-on sen­ti­ment and am­ple mar­ket liquidity.

The sSET in­dex com­pris­ing shares out­side the SET50 and SET100 has re­bounded by 50% from the low reached on March 23 when au­thor­i­ties an­nounced the first ma­jor coronaviru­s lock­down. That com­pares with a 20% re­cov­ery for the broad SET in­dex and 14% for the SET50. The SET in­dex un­der­per­formed the SET50 by 18% when the US Fed­eral Re­serve tight­ened mon­e­tary pol­icy from 2004 to 2007. The fig­ure was 5% amid sim­i­lar tight­en­ing in 2013-14 and 8% in 2016-19.

Now, with the Fed sig­nalling that in­ter­est rates will stay near zero through 2022, and with more ac­com­moda­tive mea­sures to sup­port a US eco­nomic re­cov­ery, we ex­pect small caps to con­tinue out­per­form­ing large caps.

As an­a­lysts be­gin pre­view­ing sec­ond-half earn­ings in Oc­to­ber and some com­pa­nies be­gin to an­nounce third-quar­ter earn­ings, we ex­pect share prices of com­pa­nies with a solid sec­ond-half earn­ings out­look to out­per­form the mar­ket on spec­u­la­tive trad­ing.

Earn­ings mo­men­tum plays will be sec­tors that are key ben­e­fi­cia­ries of or see­ing less im­pact from Covid-19 (Elec­tron­ics, Pa­per,

Pack­ag­ing, Agri­cul­ture, Food & Bev­er­age, Rub­ber Gloves) and sec­tors poised for a strong turn­around af­ter busi­ness re­open­ing (Fi­nance, Com­merce, Trans­port, Auto).

We rec­om­mend se­lec­tive buy­ing of small­cap stocks with strong earn­ings mo­men­tum in the sec­ond half with the fol­low­ing pre­ferred themes and top picks:

1. Ben­e­fi­cia­ries of in­creas­ing non-per­form­ing loans in the bank­ing sec­tor (JMT, CHAYO): We like JMT be­cause we ex­pect its earn­ings mo­men­tum to re­main solid. Key growth drivers will be a higher pro­por­tion of fully amor­tised loans in its port­fo­lio and an ex­pan­sion of loans to NPLs. Cash col­lec­tion should im­prove year-on-year and quar­ter-to-quar­ter in the third quar­ter, given the eas­ing of lock­down mea­sures and im­prov­ing pri­vate con­sump­tion com­pared with the sec­ond quar­ter.

We also ex­pect CHAYO to de­liver the strong­est earn­ings growth among as­set man­age­ment com­pa­nies dur­ing 2020-22 at a com­pound an­nual growth rate (CAGR) of 32%, due to its sec­tor-lead­ing NPL ac­qui­si­tion growth. We ex­pect its sec­ond-half earn­ings to grow by 54% year-on-year.

2. Ben­e­fi­cia­ries of govern­ment stim­u­lus mea­sures (DOHOME and SYNEX): We ex­pect more govern­ment stim­u­lus mea­sures aimed at boost­ing do­mes­tic spend­ing, given that of­fi­cials have 750 bil­lion baht avail­able from the an­nual bud­get and the prospect of bor­row­ing up to 1 tril­lion baht. As a re­sult, the Com­merce sec­tor will be a key ben­e­fi­ciary.

DOHOME is our pre­ferred stock on this theme, as we ex­pect it to post strong third-quar­ter earn­ings growth se­quen­tially and year-on-year. In July and Au­gust, same­store sales growth was pos­i­tive at 7-8%.

We like SYNEX for its cheaper val­u­a­tion rel­a­tive to its peers and a good near-term earn­ings out­look, which will sup­port sec­tor earn­ings. We ex­pect higher earn­ings in the sec­ond half and 2021 for the elec­tronic de­vice sec­tor, driven by new prod­ucts such as the iPad, Ap­ple Watch and iPhone 12. We ex­pect SYNEX to post strong sec­ond-half earn­ings growth of 32% year-on-year.

3. Turn­around play (SRICHA): We be­lieve SRICHA will gen­er­ate mar­ket-beat­ing re­turns in the sec­ond half, driven by a turn­around story on the back of its record-high con­struc­tion back­log. De­spite some earn­ings slip­page in the sec­ond quar­ter, we still be­lieve SRICHA will im­prove from a loss of 48 mil­lion baht in 2019 to prof­its of 178 mil­lion baht in 2020 and 404 mil­lion baht in 2021.

Im­prove­ment will be led by a high-qual­ity project back­log worth 2.1 bil­lion baht that is near its all-time high, and high profit mar­gins on that back­log, which com­prises mainly min­ing, petro­chem­i­cal and re­fin­ery projects. Strong rev­enue growth in the first half of 47% year-on-year con­firms an up­trend in SRICHA’s earn­ings up­cy­cle.

4. Prof­itabil­ity to reach new heights (ASIAN): Since 2016, ASIAN has in­creased its pro­por­tion of high-mar­gin, value-added food prod­ucts and re­duced the pro­por­tion of low-mar­gin, com­mod­ity-like prod­ucts. We thus be­lieve the stock should trade at a higher mul­ti­ple than its his­tor­i­cal mean.

How­ever, shares are cur­rently trad­ing at a dis­count of around -1 stan­dard de­vi­a­tion from its his­tor­i­cal 12-month for­ward price/ earn­ings ra­tio. Given the strong sec­ond-half out­look, we be­lieve this is an op­por­tu­nity to ac­cu­mu­late ASIAN shares.

5. Safe auto re­cov­ery play (SAT): We be­lieve SAT, a ma­jor parts sup­plier, will be the key ben­e­fi­ciary of an auto pro­duc­tion turn­around in the sec­ond half af­ter a sharp drop in to­tal ve­hi­cle out­put of 70% in the sec­ond quar­ter. We have seen an im­prove­ment in its monthly pro­duc­tion, which has risen from 25,000 units in April (-83.6% yearon-year) to 117,000 (-29.5%) in Au­gust.

We ex­pect SAT’s earn­ings to turn around from a loss of 143 mil­lion baht in the sec­ond quar­ter to show a profit from the third quar­ter on­wards. We ex­pect 2021 earn­ings will grow by 23% and 2022 earn­ings by 38% on a re­cov­ery in auto pro­duc­tion and an im­prove­ment in gross prod­uct mar­gin to 14-15% from an es­ti­mated 13% in 2020, thanks to higher op­er­at­ing lever­age.

More­over, the stock is trad­ing at around -1 stan­dard de­vi­a­tion from its his­tor­i­cal mean price to book value, which is lower than in 2011 when Thai­land was hit by wide­spread flood­ing. Given our ex­pec­ta­tions of an auto pro­duc­tion re­cov­ery to 1.1 mil­lion units this year, 1.4 mil­lion next year and 1.8 mil­lion in 2022, we be­lieve the time is right to ac­cu­mu­late SAT shares on a re­cov­ery theme.

6. The golden goose (TVO): We be­lieve TVO will gen­er­ate mar­ket-beat­ing re­turns in the sec­ond half, sup­ported by pos­i­tive earn­ings mo­men­tum and a high div­i­dend yield. The key earn­ings driver should be an up­trend in soy­bean prices sup­ported by strong Chi­nese de­mand and the im­pact of the La Nina weather pat­tern.

We ex­pect earn­ings to grow by 24% yearon-year in the sec­ond half and lift 2020 profit to 1.8 bil­lion baht, or 2.20 baht a share (up 27% year-on-year) in light of three fac­tors: sales growth of 10% year-on-year in the sec­ond half on de­mand for re­stock­ing by do­mes­tic feed mills and higher sell­ing prices; a higher gross profit mar­gin from a stock gain (11-12% in H2 ver­sus 10-12% in H1); and a bet­ter out­look for soy­bean oil prices in the fourth quar­ter on sea­son­ally higher de­mand dur­ing the veg­e­tar­ian fes­ti­val.

TVO could also ben­e­fit from a pos­si­ble in­crease in the price of crude palm oil (CPO), a prod­uct sub­sti­tute for soy­bean oil, as Thai­land will adopt B10 as the stan­dard diesel for­mu­la­tion from Oct 1, re­sult­ing in stronger de­mand for CPO to pro­duce biodiesel.

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