CLAWING BACK AFTER A STEEP SONGKRAN DECLINE

Sentiment on the Stock Exchange of Thailand (SET) was relatively weak at the beginning of April, with average daily turnover of only 33 billion baht during the first week of the month. Just before the Songkran festival, the mood brightened and the SET index broke solidly above 1,400 points, with decent turnover exceeding 40 billion baht per day.

But the good times didn’t last and the index plunged 76.09 points over four consecutive trading days as the holiday drew to a close. After reaching its nadir for the month at 1,330.24, the market clawed back over the next two weeks and closed the month at 1,367.95. Average daily turnover was 43 billion baht, up 3.4% from March.

A key factor behind the improvement late in the month was the government’s assurance that the digital wallet scheme was moving forward. Although there is still some debate over the source of funding, the government’s messaging was strong on the plan to disburse 10,000 baht apiece to some 50 million people.

May can be a mysterious month for markets. Despite the old adage “sell in May and walk away”, we believe the SET already bottomed out in April as it has rebounded nicely from 1,330 points, staying around 1,370 so far this month.

Market sentiment was boosted by strong first-quarter earnings reports by a number of large companies, especially in the banking sector. The seven banks we cover reported an aggregate net profit of 60 billion baht, up 7% year-on-year and up 25% quarter-on-quarter, beating our expectations and the market consensus.

For the overall first-quarter results of the market announced in mid-May, we project flat earnings year-on-year, but up 59% quarter-on-quarter as the previous quarter featured big adjustments from large companies such as EGCO, TU, IVL, SPRC and TRUE.

We believe the SET index should be able to pass the 1,400-point hurdle once again on upcoming positive news.

One catalyst is the recent passage of the fiscal 2024 budget, which is now being drawn down. Another is the government’s affirmation that the digital wallet scheme will start in the fourth quarter. These two factors will enhance economic conditions in the second half of 2024 and into 2025.

RATE CUTS LIMITED

Although the market now expects the US Federal Reserve to make only one interest rate cut in 2024 late in the year, we believe this has already been factored into global stock market pricing.

Locally, we believe the Bank of Thailand could maintain its rate at 2.5% throughout 2024.

Our investment strategy for this month is focused on stocks with upbeat earnings and those expected to benefit from second-half budget disbursement and the digital wallet.

Our picks include Asian Alliance International (AAI), Bangkok Dusit Medical Services (BDMS), CP Axtra (CPAXT) and NSL Foods (NSL).

We have upgraded our recommendation on AAI. The company, which exports pet food (mainly to the US and Europe), announced a first-quarter net profit of 242 million baht, jumping both year-on-year and quarter-on-quarter and exceeding our expectations. The key factor was a return to normal margins above 20%, after two years of lower margins because of customer order delays. Pet food is one of the few export categories that grew in the first quarter, especially shipments to the US. Looking forward, we believe AAI will continue to benefit from projected growth in the pet food market.

In the healthcare sector, we are expecting BDMS to report a first-quarter net profit of 3.9 billion baht, up 14% year-on-year and flat quarter-on-quarter. A combination of a seasonal slowdown for hospitals and Ramadan taking place within the quarter should depress first-quarter earnings. However, given the upbeat results of peer Bumrungrad Hospital (BH), we expect the operator of the Bangkok Hospital chain to show some resilience. Management expects to grow net profit by 10-12% in 2024 and to book an earnings before interest, taxes, depreciation and amortisation (Ebitda) margin of 20-25%. Two new hospitals are to start operations by mid-year, bolstering 2024 performance for the group. BDMS will also increase its proportion of Social Security patients in the near future. Lastly, with the growth of tourism, BDMS should see gains from medical tourism.

In the commerce space, we expect CPAXT to report a net profit for the first quarter of 2.3 billion baht, up 19% year-on-year but down 21% on the quarter based on seasonal impact. We anticipate same-store sales growth of 2.5% for the wholesale arm, while Big C, its retail arm, should see healthy same-store sales growth of 6.4%, supported by branches in Malaysia, for which we project growth of 8%. CPAXT should also benefit from the improvement in economic conditions and digital wallet spending. Regarding the latter, though the funds may not be spent at CPAXT stores directly, we expect purchases by smaller retail shops to increase as they stock up on products to sell to customers that received the funds.

One small company we like is NSL. The sandwich producer just extended its contract with 7-Eleven for another six years, securing its future revenue stream. NSL should also benefit from the digital wallet as the funds can be used in convenience stores where the company has its products. We expect NSL to report a net profit of 100 million baht for the first quarter, while operations should continue to improve as product lines are expanded.

We believe the Bank of Thailand could maintain its benchmark interest rate at 2.5% throughout 2024.