This article first appeared in The Edge Financial Daily on May 4, 2018

KUALA LUMPUR: With the potential trade war between the two largest economies in the world, the US and China, sparking uncertainties around the world, on top of weaker demand for smartphone products, the technology sector is less represented in the latest edition of RHB Research Institute’s small-cap picks.

The tech sector, which was one of the biggest winners in 2017, is also expected to see its earnings affected by a stronger ringgit. This has led to the decline of the Bursa Malaysia Technology Index by 25.1% to 31.17 points year-to-date (YTD). In 2017, the RHB Top Malaysia Small Cap Companies 25 Jewels 2017 edition, five companies in the tech sector were selected. This year, there are only two: JHM Consolidation Bhd and Nova MSC Bhd.

RHB Research Institute head of Malaysia research Alexander Chia said the stocks selected this year represented 10 industry sectors, with the biggest concentration in construction, consumer and industrial. “The news flow in the construction sector should remain positive in the year ahead, with billions in contract awards coming from three key infrastructure projects — mass rapid transit Line 3, the East Coast Rail Link, and the Kuala Lumpur-Singapore High-Speed Rail alone. A pickup in domestic demand is also a key theme for economic growth in 2018,” he said.

The median price-earnings valuation for RHB’s small-cap picks this year is 14.9 times, while its return on equity of this year’s picks is 12.1%. In line with the decline seen in the small-cap space so far, these companies have also been on a downtrend with an average share price loss of about 8.3%, indicating a potential buying opportunity should the sentiment improve post-election. Dayang Enterprise Holdings Bhd is the best performing stock on the list so far with a 14.7% gain YTD, while JHM Consolidation fell by the most compared with the other 19 companies on the list, with a decline of 30% YTD.

During the launch of its small-cap picks — RHB Top Malaysia Small Cap Companies 20 Jewels 2018 — yesterday, there were also corporate presentations by five of the companies, namely Advancecon Holdings Bhd, GFM Services Bhd, HSS Engineers Bhd, Kelington Group Bhd and Rohas Tecnic Bhd.

RHB Banking Group managing director Datuk Khairussaleh Ramli, who launched the book, said the opportunities presented in the small-cap space are huge, given that there are 821 companies on the stock exchange with a market capitalisation of below RM1 billion.

In the book, 17 companies or 85% of the 20 have a market capitalisation of less than RM1 billion. Sarawak Oil Palms Bhd, at RM2.1 billion, has the largest capitalisation, while Nova MSC, with a market cap of RM75 million, is the smallest.