Thailand
Thailand: Post-lockdown prospects brighten as malls revive
The government has embarked on the next phase of economic reopening with confirmation that shopping malls, department stores and food courts will be among the businesses allowed to resume tomorrow, albeit with public health and safety stipulations.
The market has already priced in a partial recovery of economic activity in the second half of 2020; the SET has rebounded roughly 30% from its nadir in March. But some sectors are still trading below their long-term mean price/earnings (PE) ratios, implying further upside in the event that companies recover more swiftly as the lockdown is eased further.
Our year-end SET target of 1,306 points represents a 9% discount to our year-end 2021 target of 1,435, implying a PE ratio of 16.5 times estimated 2021 earnings per share (87 baht). By halving the discount to 4.5%, we arrive at an end-June 2021 target of 1,371.
Step-by-step easing: The easing of the lockdown imposed to curb the spread of Covid-19 started with low- and moderate-risk businesses and low- and moderate-risk provinces, enabling renewed income flows for workers and companies that had been affected by shutdown orders.
Looking at China’s experience, we see that authorities first allowed the resumption of construction, property sales, medical services, automotive sales, shopping malls and restaurants (in that order); demand recovered quickly.
In Thailand’s case, we expect discretionary spending to recover more slowly, due to lost income and higher unemployment. We still prefer the Commerce sector (especially firms with big upcountry footprints), Finance (diminished NPL risk with the resumption of business and the prospect of decent loan demand), Contractors (new state infrastructure projects to open for tender), and Food (demand recovery, export opportunities).
The winding down of lockdowns overseas (albeit with risk of curbs being reimposed if infection rates surge) could also benefit the Electronics and Chemical sectors.
EQUITY OUTLOOK
The SET bounced on expectations that the local lockdown would be eased, now that Covid-19 cases are very low. Sentiment was buoyed by sizeable fiscal (1 trillion baht, equal to 6.2% of GDP) and monetary measures (500 billion baht in soft loans and a 400-billion-baht bond stabilisation fund), along with looser repayment schedules for borrowers. These measures have fuelled confidence that the country will recover in the second half of 2020.
Although analysts’ 2020 GDP forecasts now call for a contraction in the 4-6% range and the consensus SET EPS projection has been slashed by 31% to 72 baht (with further downside risk), investors are already looking past the first half of 2020 and focusing on normalising fundamentals and valuations next year.
Further SET upside could be fuelled by confidence over effective containment of Covid-19 (especially overseas) after the unwinding of lockdowns (without which global markets would drop in May, dragging the SET down with them). But the sustained low-yield bond environment for at least the next four quarters should keep the equity yield gap valuation attractive.
A 2020 PE ratio of 17 times may seem too high, given particularly weak first-half earnings. SET profit for the first quarter plunged by more than 50% year-on-year, while the second-quarter forecast is for declines of about 40% tied to the impact of global and domestic lockdowns.
Banks and finance firms, meanwhile, will be squeezed by government-stipulated debt relief programmes. So we believe the SET is vulnerable to a renewed correction in May.
Inexpensive PE ratios: Our current 2020-21 earnings forecasts assume a near-normal business environment next year. With that in mind, a number of stocks are currently trading significantly below their five-year means, while the SET is near its five-year mean.
The cheap stocks are concentrated in the Bank, Energy and Property sectors, due to market perceptions of prevailing macroeconomic risks. We expect evidence of a nascent economic recovery building momentum later this year. This will prompt the market to bid up these sectors in anticipation of company earnings resuming near-normal levels, making for handsome trading profits.
Risks include weaker economic momentum (global and Thai), especially if impacts from the outbreak are more extensive than initially expected; falling oil prices; and geopolitical tensions including trade conflicts.
Source: https://www.bangkokpost.com/business/1919012/post-lockdown-prospects-brighten-as-malls-revive