This article first appeared in The Edge Financial Daily on June 18, 2018

KUALA LUMPUR: After weak first-quarter financial results, stocks on Bursa Malaysia faced rating downgrades which largely eliminated buying opportunities following the post-general election market correction and a regional sell-off in May.

Fortunately, there are still companies whose shares are trading at a bargain with a healthy balance sheet, earnings growth prospects and expansion plans in place.

The Edge Financial Daily highlights several undervalued counters with strong fundamentals, supported by movements in key market forces like the ringgit and oil prices.

1. Thong Guan Industries Bhd

The poor first-quarter results and the recent equity selldown have pushed down Thong Guan Industries Bhd’s share price by 38% year-to-date (YTD).

Margins for the exporter of plastic packaging products were squeezed by a stronger ringgit and rising operating costs. Its F&B division also stayed in the red, although losses have narrowed.

The ringgit has depreciated against the US dollar since April, with year-end estimates varying widely from 3.65 to 4.00 amid persisting headwinds on the greenback and uncertainty over policies of the new Malaysian government that could influence the ringgit.

Further, any potential gain in crude oil prices — which could hike the ringgit and plastic feedstock prices — could be balanced out by a pickup in US shale oil production.

To increase sales capacity, Thong Guan plans to commission two new lines by end-2018 and another RM500 million plant in Kedah by the first quarter of 2019, which could house 28 production lines.

It has also reportedly signed a contract to supply RM70 million to RM80 million worth of its organic noodles to China annually, pending necessary approvals.

The company had cash balances of RM138 million as at March 31, against RM65.75 million in current borrowings, while its gearing ratio stood at 0.19 times.

The counter has one “underperform” call by Kenanga Research with a target price (TP) of RM2.25, whereas CGSCIMB Research has given it an “add” call, with a TP of RM4.48.

Bloomberg estimated 2018 earnings per share (EPS) of 38.5 sen for the stock. At the latest close of RM2.59, the share price translated into 6.7 times 12-month forward price-earnings ratio (PER).

2. AirAsia Group Bhd

Despite a strong net profit growth in the recent quarter, AirAsia Group Bhd shares suffered selling pressure in May after it supported Barisan Nasional in the run-up to the 14th general election (GE14), and also due to a corruption probe into AirAsia India which delayed plans for the unit to go public.

Regardless, management is determined to turn the 49%-owned Indian unit to profit in 2018. AirAsia Philippines is also on track for a listing by the second half of 2019.

Rising jet fuel prices impacted its core net profit for the first quarter ended March 31, 2018. Every US$5 (RM19.90)/bbl rise in spot jet fuel prices will reduce the group’s core earnings by 21%, according to a CGSCIMB Research note dated May 28.

AirAsia seeks to mitigate this by improving ancillary sales and group-wide efficiency, including through higher average utilisation rates of its planes. A weaker US dollar could also improve margins for its Philippine and Indonesian units.

At end-March, AirAsia had cash balances of RM2.03 billion against short-term borrowings of RM1.42 billion. Its gearing ratio stood at 0.34 times in the same period.

Its shares are currently trading at 6.84 times forward-PER based on the last close of RM3.20 and Bloomberg’s FY18 EPS estimate of 46.7 sen.

It has 13 “buy” calls, three “hold” calls and one “underweight” call, with the lowest TP of RM2.90 by JP Morgan and highest at RM6.30 by Macquarie.

3. DRB-Hicom Bhd

Narrowing losses of 50.1%-owned Proton Holdings Bhd in the year ended March 31, 2018, turned DRB-Hicom Bhd profitable for the first time in four years, with a net profit of RM498.44 million on the back of a 6% increase in revenue to RM12.79 billion.

DRB-Hicom said the rationalisation exercise of non-industrial assets is expected to be completed by end-2018 — largely to refocus its funding on Proton’s turnaround story.

Its aviation unit Composites Technology Research Malaysia Sdn Bhd (CTRM), which turned a profit last year, has secured an order book of RM9.5 billion lasting until 2031.

CTRM will also have a new plant by September to add another RM200 million to its annual revenue contribution of around RM900 million.

Elsewhere, short-term earnings growth may be minimal from its subsidiaries Honda Malaysia Sdn Bhd and Pos Malaysia Bhd. A weakening ringgit could also hurt margins moving forward.

As at March 31, DRB-Hicom had cash and cash equivalents of RM2.85 billion against short-term borrowings of RM2.32 billion, with a gearing ratio of 0.75 times.

Despite trading at a 10-year historical PER of around 9.97 times and a high forward PER of 24.03 times, analysts covering the counter are “ upbeat” based on sum-of-parts (SOP) valuation with six “buy” calls and one “hold” call — with a TP ranging from RM1.99 by AmInvestment Bank Research to RM2.70 by CGSCIMB.

4. Uzma Bhd

Integrated oil and gas services equipment (OGSE) firm Uzma Bhd has seen its share price decline in tandem with the decline in the FBM KLCI.

The group, which has announced a change in its financial year end, reported a 38.64% fall in net profit to RM24.13 million for the 15-month period ended March 31, 2018, compared with RM39.33 million for the 12 months ended Dec 31, 2016. Revenue slipped 0.72% to RM467.64 million.

Aside from foreign exchange losses, the net profit decline was also due to larger operating expenses, which the group said was necessary to incur early on as contracts won earlier are now starting to kick in.

Uzma has secured seven multi-year umbrella contracts with Petronas Carigali Sdn Bhd since the beginning of this year — although the bulk of them are on a on-call basis.

It has also scaled up in technology-oriented services with high demand in a low oil price environment, such as well-testing and fishing contracts, and potential products such as laying of non-metallic pipelines, according to analysts.

Uzma’s tender book stood at RM7.3 billion as at end-May. Its order book stood at RM1.4 billion, with another RM400 million expected to come from the umbrella contracts, according to analyst estimates.

It commands a 12-month forward PER of 8.82 times, with four “buy” calls and two “hold” calls presently. Its TP ranges from RM1.04 by Hong Leong Investment Bank Research to RM1.70 by Credit Suisse.

5. OSK Holdings Bhd

OSK Holdings Bhd has guided that its property segment will be “quiet” in 2018 with fewer ongoing projects.

However, unbilled sales had remained attractive at RM1.2 billion as at March 31. Its land bank stood at 2,016 acres (815.85ha), with an estimated gross development value of RM8.5 billion.

Its construction division also has an outstanding order book of RM311 million.

Meanwhile, its 10.1%-associate RHB Bank Bhd has recently risen to be among the top analyst picks for banking counters amid strong quarterly income growth and expectations of normalising operating expenditure moving forward.

Additionally, a few corporate exercises are brewing in the well-established conglomerate, which could prove exciting in the short  to medium term.

They include the proposed listing of its cable business unit OCC Cables Ltd on the Hong Kong Stock Exchange by end-2018 as it seeks to raise funds for OCC Cables’ future expansion.

The Edge Malaysia weekly also reported in January that OSK was looking to sell its 16-storey Faber Towers in Taman Desa, with a valuation ranging between RM230 million and RM250 million.

OSK shares are trading at 4.88 times 12-month trailing PER, although its illiquidity could be unattractive. With consistent dividend payouts over the years, investors can expect an annual dividend yield of 5.22% based on its last closing share price of 99 sen.