Still plenty of value in small caps, says RHB

by **Cals** Wed 21 May 2014, 17:15

Business & Markets 2014

Written by Adrian Wong of theedgemalaysia.com

Wednesday, 21 May 2014 10:50

KUALA LUMPUR: There is still tremendous value to be found in local small capitalisation stocks, said RHB Research Institute Sdn Bhd head of research Alexander Chia.

“Clearly, the interest in markets from both the domestic and foreign perspective continues to stay strong, and liquidity conditions continue to favour investments in equities,” he said at the launch of the 10th edition of the RHB Top Malaysia Small Cap Companies 30 Jewels book yesterday. The book encompasses the bank’s top 30 small cap picks on the local bourse with a market capitalisation of under RM3 billion.

Small caps have yielded returns of 14% and 29.5% respectively last year, as measured by the FBM Small Cap Index (FBM SCI) and FBM Fledgling Index (FBM FI). The FBM SCI outperformed the benchmark FBM KLCI by over 10% in 2013, which only recorded a return of 3.2%.

RHB Research’s criteria for the book include management credibility, industry fundamentals, earnings growth potential, as well as industry track record.

The 12 “jewels” unearthed in this year’s book by RHB Investment Bank Bhd are Hong Leong Industries Bhd (basic materials), Gadang Holdings Bhd (construction), EITA Resources Bhd (construction), Hovid Bhd (healthcare), Complete Logistics Services Bhd (logistics), GD Express Carrier Bhd (logistics), Barakah Offshore Petroleum Bhd (oil and gas), LBS Bina Group Bhd (property), SBC Corp Bhd (property), Inari Amertron Bhd (technology), OCK Group Bhd (telecommunications) and REDtone International Bhd (telecommunications). The average price-earnings ratio (PER) of these 2014 jewels was 16.6 times with a three-year net profit compound annual growth rate of 32%.

In an effort to provide a broader selection of stocks, RHB Research has increased the number of sectors covered to 15 from 13 in 2013 and 12 in 2012. For 2014, it favours sectors with strong growth potentials such as property, construction, banks and plantations.

Interestingly, 83% of the jewels listed in the book have market caps of less than RM2 billion, which further underlines RHB’s stance that value in small caps is still present in the local equity market.

However, Chia warned that small caps may not be for everybody.

“If you’re a pensioner investor, you want a steady stream of dividends and you want to protect your capital. So clearly, you want to invest in stocks that have lower volatility,” he said.

“But if you’re a younger investor and can afford to take a higher degree of risk, then you probably want to invest a portion of your portfolio in higher beta stocks with greater volatility, greater capital gain and upside potential.”

Chia said buying into small cap companies also means buying into confidence in their management.

“Essentially, when you buy an unknown small cap company, you are actually buying management ... you are buying the degree of trust and belief that you have that management can actually deliver.”

He said it is the entrepreneurial spirit that sets a company apart, as well as management’s ability to drive new ideas and identify new growth segments for the company to grow.

Chia expects the KLCI to hit 1,940 points by the end of the year on the back of inflows from net foreign buying as well as strong fundamentals. The target is derived from a one-year forward PER of 15.5 times.

This article first appeared in The Edge Financial Daily, on May 21, 2014.