CIMB remains overweight on small-cap stocks

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KUALA LUMPUR: CIMB Research remains overweight on small-capitalised stocks, saying that the companies under its coverage did not disappoint and turned in results that were even better than in 4Q2009.

The research house, which said Wellcall Holdings Bhd was its top pick, added that over the past three months it had revised its recommendation for just one stock, Asia File Corporation Bhd which was upgraded from neutral to outperform.  

“Out of the 19 companies that announced their results in April-May, two beat our expectations, 14 were in line and only three fell short. This means that 84% met or exceeded our expectations, higher than the 76% that did so in 4QCY09,” it said.

CIMB said the share price pullback in May had taken small-cap valuations to attractive levels, with an average CY11 P/E of less than eight times for its selection.

“We remain overweight on small caps, with our core top picks being those that enjoy steady and defensive earnings growth like rubber glove and flexible packaging stocks,” it said.

The research house said small-cap stocks started the year strong but had given back most of their gains by May.

Year-to-date (YTD), the FBM Small Cap Index is up only 3% though still better than the FBM KLCI’s 1% gain, it said.

The Small Cap Index outperformed the KLCI up until April but came under pressure after that, it said.

CIMB said Wellcall was its top small-cap pick for June, adding that in its small-cap universe, Wellcall offered the highest dividend yield of 12% gross and 9% net for CY10.

“This should provide strong support for the stock in volatile equity markets.

“The share price also enjoys support from its net cash of 32 sen per share, which is equivalent to 26% of its current share price,” it said.

On Asia File, the research house said the global crisis had opened up new opportunities for the company as the weak consumer sentiment in the US and Europe had forced distributors to source for cheaper yet quality supplies, which the group was able to deliver.

“Europe remains Asia File’s main market, contributing 70% of its revenue. Another 15% comes from the US. Sales growth in FY10 came from the US, Australia, Japan and New Zealand.

“With Plastoreg in its fold, Asia File is today the world’s largest OEM producer of dividers and indices. Its balance sheet remains strong with RM25 million (22 sen per share) net cash as at end-March 2010,” it said.

Meanwhile, CIMB said China-based Xingquan International Sports Holdings Ltd was the cheapest stock in its small-cap universe, as it  was trading at only 2.3 times CY11 P/E and offered a gross dividend yield of above 5%.

However, in the immediate- and medium-term, it was taking a more defensive stance on small caps given the global and regional stock market correction in the past few weeks and the uncertain direction of equity markets worldwide. “We expect the downtrend to continue in the medium term, with the markets touching bottom probably sometime in 3Q10,” it said.

This should be followed by a rally in 4Q10. Further price weakness should offer long-term investors the opportunity to accumulate stocks at much more attractive levels in the coming weeks.

CIMB said defence was the best offence for now. “We favour small caps that offer high dividend yields as this provides some support for share prices amid further volatility in equity markets.”

It also said glove makers and consumer goods companies offered defensive earnings. It remained bullish on glove stocks such as Latexx Partners Bhd and Adventa Bhd which continue to offer strong defensive earnings growth. “We also like consumer or consumer-related stocks like CI Holdings, Cocoaland, Daibochi Plastics and Tomypak Bhd, which offer exposure to the resilient domestic consumer market.”

Among its small-cap stock coverage, the research house said stocks that offer gross dividend yields of at least 7% include Wellcall, Uchi Technologies Bhd, Daibochi Plastic and Packaging Industry Bhd, Cocoaland Holdings Bhd, Tomypak and Asia File. “Wellcall offers a hard-to-beat yield of 12.6% gross or 9.5% net,” it noted.

In its small-cap universe, low-beta stocks include Asia File, Xingquan, Cocoaland, Jobstreet Corporation Bhd, CI Holdings and Hunza Properties Bhd. High-beta stocks include Pelikan International Corporation Bhd, Dreamgate Corporation Bhd, Suria Capital Holdings Bhd and Tomypak.

CIMB has outperform calls on Adventa, CI Holdings, Cocoaland, Daibochi, Eksons Corporation Bhd, Hunza, Jobstreet, Latexx, Notion Vtec Bhd, Uchi, United Malayan Land Bhd and Xingquan.

The research house said it had a trading buy recommendation on Pelikan, neutral call on Suria and underperform ratings for Dreamgate, Ekovest Bhd and MTD-ACPI Engineering Bhd.

This article appeared in The Edge Financial Daily, June 8, 2010.