Lead Story: Bargain hunting penny stocks

This article first appeared in Capital, The Edge Malaysia Weekly, on July 23, 2018 - July 29, 2018.
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SINCE the beginning of the year, several counters on Bursa Malaysia have seen a selldown amid disappointing corporate results, policy uncertainties brought about by the change in government and external factors, including the US-China tariff war and rising US interest rates.

Notwithstanding intact fundamentals, some of these counters have become penny stocks. Their attractive valuations give rise to opportunities for bottom fishing, fund managers say, especially as the benchmark FBM KLCI has started to rebound after touching a 17-month low of 1,663.86 points a fortnight ago.

The index has been on an upward trend in recent weeks, climbing 6.17 points or 0.35% to close at 1,759.24 last Thursday.

“It is relatively safe to buy at the early stage of the rebound but as the rally progresses, investors need to be a bit more careful as there will be a question mark over how far the bounce will go,” says Inter-Pacific Securities research head Pong Teng Siew.

“Not all counters will continue to rebound and some of them will give up their gains after a while,” he cautions.

Public Investment Bank (PublicInvest) head of research Ching Weng Jin tells The Edge that the climb in index-linked counters will eventually filter through to the others.

“Market sentiment seems to be improving, looking at the rise in the FBM KLCI. It will filter through eventually to penny stocks and the smaller caps, but on a selective basis as I doubt the stocks overall will see the same rate of recovery. They have become penny stocks for a reason,” he says.

Stocks like Malaysian Resources Corp Bhd (MRCB), which has fallen more than 30% year to date to 71 sen, was a major beneficiary in the construction sector under the previous administration, he says.

A joint venture between MRCB and George Kent (M) Bhd was initially appointed as the project delivery partner (PDP) for the LRT3 project, which has since been reviewed and put on a fixed-cost model rather than a PDP model, calling the margins the companies will earn from the project into question.

Another counter that was impacted by the change in government is MyEG Services Bhd (MyEG). Since the 13th general election (GE13), it has held a monopoly on government e-services, including the Goods and Services Tax (GST) monitoring project.

Following GE14, the counter dipped to below RM1 for about two months, touching a low of 69 sen before rebounding in line with the broader market to close last Thursday at RM1.12 — only half its price of RM2.23 at the start of the year.

Despite the change in government, Macquarie Research (MQ Research) says MyEG is still a key beneficiary should the new government require a monitoring system following the upcoming repeal of GST and the reimplementation of the Sales and Services Tax, albeit at thinner margins.

“MQ Research believes there is a chance the quantum of payments from the government to MyEG will be smaller than what was previously agreed to under the previous regime (RM1,000 per dongle),” writes the research house in a recent note, noting that the new government will continue to tighten its belt.

Meanwhile, PublicInvest’s Ching says the research house retains “buy” calls on two stocks that have fallen below the RM1 mark — property developer LBS Bina Bhd and construction company Chin Hin Group Bhd.

LBS Bina has been trading between 82 sen and 97 sen since March as its share price adjusted after a bonus issue and share split in February. Last Thursday, it closed up one sen at 86 sen.

The research house has a target price of RM1.31 on LBS Bina, given the group’s entrenched position as a leading player in the domestic affordable housing market. Moreover, the company could benefit from the new government’s push for the provision of more affordable housing, it adds.

The research house also recommends Chin Hin, which saw its share price affected by uncertainties in the domestic construction sector. The counter is now hovering around the 80 sen mark, compared with RM1.21 at the start of the year.

Catalysts for the group include increased contributions from its capacity expansion in the concrete and precast concrete businesses, as well as greater penetration of the industrial modular building system space.

Another bargain could be property developer Magna Prima Bhd, by virtue of its ownership of a prime 2.6-acre plot in Jalan Ampang, Kuala Lumpur — the former site of the Lai Meng Girls School.

Magna Prima dipped to 97 sen but had rebounded to close at RM1.06 last Thursday, for a market capitalisation of RM352.58 million, which is less than the price tag for the 2.6-acre plot, which, according to past reports, was put up for sale for about RM400 million in July 2015.

In June last year, Hua Yang Bhd, which owns a 30.95% stake in Magna Prima, said the land could be developed either in the financial year ending March 31, 2019, or the following year.

Information and communications technology company Prestariang Bhd could be another bargain, after it clarified earlier this month that its RM3.5 billion National Immigration Control System (SKIN) project — signed during the tenure of the previous government — is going ahead as planned.

After a meeting with the Council of Eminent Persons on July 4, Prestariang group CEO Dr Abu Hasan Ismail announced it would be business as usual, and that there would be no review of the 15-year concession.

CIMB Research has an “add” call on Prestariang with a target price of RM2.05, providing an upside of 110% to its closing price of 97.5 sen last Thursday.

The research house says in a note that the company is also exploring other projects for the Immigration Department, leveraging SKIN’s infrastructure.

“Any add-on services would entail only marginal additional costs for the Immigration Department. We have not assumed any new potential projects for Prestariang riding SKIN’s infrastructure,” says the research house.

 

 

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