Cover Story: Finding undervalued gems

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ALL 40 stock picks by InsiderAsia between Oct 10 and Dec 15, 2014, had registered gains after they were featured on theedgemarkets.com, which was launched on Oct 10.

This showed a 100% hit rate, meaning that readers who acted on the stocks immediately after they were featured stood the chance of making gains from them, in spite of a volatile market environment towards the end of last year.

According to the table compiled, the highest gains these stocks had achieved after being picked ranged from 0.15% to 45.9%, with the average at 8.8%. Most of the counters hit the high price point not long after they were featured.

For the uninitiated, InsiderAsia picks one stock every market day and features it on theedgemarkets.com and The Edge Financial Daily (FD) on the same day.

While the stock pick appears on both theedgemarkets.com and FD, the detailed write-up on the reasons the stock is picked is first carried in the latter. FD is available in both print and digital copy — the latter is available for free, with readers having just to register with theedgemarkets.com.

InsiderAsia, or Asia Analytica Sdn Bhd, is a licensed investment adviser and a sister company of The Edge. In its stock picking process, it screens an extensive list of stocks listed on Bursa Malaysia, aided by a specially-programmed algorithm, and then makes the selection based on a number of factors ranging from the companies’ balance sheet strength, earnings growth, catalysts and prospects, market velocity and so on.

This process has uncovered some undervalued gems among the over 900 listed companies. These included Oceancash Pacific Bhd (which rose from 31 sen to a high of 45 sen on Nov 10, after being picked on Oct 10), Willowglen MSC Bhd (highest gain achieved: 26.53%) and Cocoa Land Holdings Bhd (18.5%).

At The Edge 2015 Economy and Investment Outlook Forum last November, The Edge Media Group executive chairman Datuk Tong Kooi Ong said InsiderAsia’s stock picks are meant to give prominence to under-researched, small to medium-size companies that look to be undervalued and have sustainable business models.

Little-known manufacturers

In an interview with The Edge for the Nov 17-23, 2014 issue, Oceancash executive chairman and CEO Tan Siew Chin said the company was little known among the investment community because of its nature of business being an original equipment manufacturer. It produces resinated felt and non-woven fabric.

“We don’t market ourselves because our products are not for the retail segment. That’s why we’re not exactly widely known by most people,” he said.

Oceancash’s situation is not unique, as many of the 40 stocks picked by InsiderAsia during that period also manufacture raw materials or parts for various industries, with their brand visibility almost shielded by the end-product players. Some also have their key markets overseas.

A number of these stocks hardly gained interest before they were featured by InsiderAsia. For instance, Magni-Tech Industries Bhd, which produces clothing for sportswear giant Nike Inc, had an average daily turnover of only 42,554 shares on Bursa in the one year before it was featured by InsiderAsia on Oct 28. The company has an issued share base of 108.5 million.

The same goes for Willowglen MSC, which had been thinly traded before being discovered recently. The company provides Supervisory Control and Data Acquisition services for various multinational corporations, with most of its revenue derived from Singapore.

The company has shown strong earnings growth, with net profit up 128% in two years to RM19.36 million for the financial year ended Dec 31, 2013 (FY2013). Its nine-month net profit ended Sept 30, 2014, was RM11.81 million.

Attractive valuations and clean balance sheets

Nevertheless, InsiderAsia did not just pick all small companies that research houses rarely track. It did feature Sunway Bhd, a property and construction giant with a market capitalisation of RM5.66 billion, on Nov 13 after the stock faced selling pressure as Singapore’s sovereign fund GIC Pte Ltd was in the midst of trimming its holding in the company.

At last Friday’s close of RM3.24, Sunway was trading at a forward price-earnings ratio (PER) of 11.6 times, compared with Gamuda Bhd’s 15.3 times.

Likewise, Johor-based property developer KSL Holdings Bhd was also featured by InsiderAsia on Oct 21, citing its attractive valuation. According to InsiderAsia, KSL has one of the highest profit margins among Malaysia’s property developers. Its gearing level has also been substantially reduced over the past two years, indicating a strong balance sheet.

Meanwhile, InsiderAsia had also picked Ajinomoto (M) Bhd, as the stock’s low-teen valuation was deemed at a substantial discount to other multinational consumer stocks, which command valuations of 20-odd times PER.

Ajinomoto, which has zero debt, had also grown its cash pile from RM67.1 million as at the end of its financial year ended March 31, 2012 (FY2012) to RM115.81 million as at 2QFY2015.

‘100% success rate’

All the stocks that had been featured by InsiderAsia stirred interest among the investing community. Oceancash made the biggest gain, as its high of 45 sen was a 45.9% jump since it was featured on Oct 10. This was also its all-time high.

KSL, despite having moved higher before InsiderAsia’s profile, jumped 60 sen or 14.63% to its closing high of RM4.70 on Nov 3, after it was spotted by InsiderAsia on Oct 21. The company then issued bonus shares on Dec 22, with its stock subsequently adjusted to close at RM1.82 last Friday.

Nonetheless, bearish market conditions over the past two months have pushed most of InsiderAsia’s stock picks to below the prices on the day they were profiled.

This could present buying opportunities in those counters. At least, dividend seekers could be enticed by the widening yields. Fima Corp Bhd, for instance, had a trailing 12-month yield of 4.79% as at last Friday. The shares were nine sen or 3.57% lower at RM2.43 compared with RM2.52 when it was profiled on Dec 1.

Meanwhile, plastic packaging manufacturer Thong Guan has fallen 12 sen or 5.8% since it was featured by InsiderAsia on Nov 14 to RM1.95 as at last Friday. This raised its yield to 5.88%.

 

This article first appeared in The Edge Malaysia Weekly, on January 5 - 11, 2015.