WHEN tabling Budget 2017 last October, Prime Minister Datuk Seri Najib Razak announced that a small and mid-cap public listed companies (PLC) research scheme will be introduced to conduct research on 300 firms, in a move to “invigorate” the domestic capital market.

Three months on and Bursa Malaysia appears to be kick-starting the scheme. It has sent out invites to stockbroking houses, seeking their feedback on initiating coverage on small and mid-cap stocks that are currently under the radar.

Stockbrokers and heads of equity research whom The Edge contacted say each stockbroking house has been invited to provide Bursa with a list of up to 30 PLCs that they plan to cover. Should the plan materialise, a research house is obligated to publish at least three reports a year and will be paid RM25,000 per annum for each company covered.

It is also learnt that there are two tiers under the scheme. In the first tier, a research house can select 15 small-cap stocks with a market capitalisation of RM250 million to RM500 million. Under the second tier, it can choose another 15 mid-cap stocks with a market capitalisation of RM500 million to RM2 billion.

In general, the market is positive about the programme as most people believe many small and mid-cap companies are currently under-researched.

Ideally, the scheme would increase the exposure and visibility of these 300 companies and benefit investors, as it could help unearth hidden gems.

But just how keen are the stockbroking houses on participating in this scheme?

In terms of rewards, the RM25,000 that is being offered is in fact 66% higher than the RM15,000 per company a year offered under the existing scheme, known as the Capital Market Development Fund-Bursa Research Scheme (CBRS).

However, it is not just about the money. The reality is that most research houses are facing a manpower shortage. They are unsure whether they should hire more analysts to take up the new job, partly because they are uncertain how long the scheme will be in existence.

Inter-Pacific Securities head of research Pong Teng Siew opines that Bursa and the government should provide more clarity on the small and mid-cap PLC research scheme.

“It is true that manpower constraints is one problem. It will take some time for us to arrange [our workforce]. We need to know how long this new scheme will last, so that we can decide whether we should recruit new analysts or continue to rely on the existing team,” he tells The Edge.

That the government is willing to pay for the research fees is good as not all research houses are keen to cover small and mid-cap stocks, says Pong.

“For business considerations, research houses are often seen as a cost centre as they do not usually generate business revenues, so they might not want to deploy more resources to cover these counters,” he explains.

Pong confirms that Inter-Pacific Securities has received the invite from Bursa but he declines to reveal the details.

“All I can say is the new scheme is very similar to the CBRS. But the CBRS was paid by the individual listed companies, so to some extent, there could be conflict of interests.

“Many times when a research house wanted to issue a negative report or downgrade a rating to ‘sell’, a company would just stop the payment because why should it pay for a negative report? So, the new scheme will not be paid for by the company,” says Pong.

Bursa had not respond to The Edge’s queries on the matter at press time.

Last November, Second Finance Minister Datuk Johari Abdul Ghani reportedly said that free research coverage will be provided for 300 small and mid-cap companies listed on Bursa, to ensure that the research analysis is independent and transparent.

“We need to do something to promote our small and mid-caps, and we don’t charge them. This is how it should be. The moment you start charging, they may say, ‘How can I pay you when you give my company a strong ‘sell’ [call]?’ I think it wouldn’t work that way,” Johari had said.

He also stressed that each stock needs to be covered by at least two research houses, and they will be obliged to issue rated reports on these under-the-radar listed companies.

“We will pay for the research, but we need the research houses to come out with recommendations, [be it] a strong ‘sell’, ‘buy’, ‘add’ or ‘hold’ [call],” Johari stressed.

One research head expects only half the stockbroking firms to be interested in participating in the scheme.

“For the bigger firms, especially those that are bank-backed, they probably won’t be too keen on this because they have more important things to do, and RM25,000 is nothing to them. But for the smaller firms, this new scheme is actually good, provided they have the manpower,” he says.

Generally, a smaller research house has about 5 to 15 analysts while its larger counterpart has at least 15 analysts. On average, each analyst covers 10 to 20 stocks.

“Manpower is a concern. Our industry is actually shrinking due to M&A (mergers and acquisitions). Today, we only have about 20 to 30 research houses. But if the money is there, we might consider hiring again. The expertise is always there — it is just a question of how long you want to employ them [for],” says the research head.

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