INVESTORS will be greeting the New Year under dark clouds of uncertainties over the ringgit, the rout in the oil market and the resulting impact on the country’s budget deficit, trade and current accounts — and last but not least, economic growth.
The ringgit has already fallen sharply in the past month, hit by a double whammy. Firstly, with the US economy gaining traction — and feeding expectations of higher interest rates — there is a rush of capital back to the greenback. The unwinding of foreign shareholdings in Malaysian Government Securities (MGS), thus far, may just be the tip of the iceberg.
As a net exporter of oil and gas, Malaysia is seen as a loser from the steep drop in oil prices, which may have more room to fall before stabilising. And even then, prices may stay low for a considerable period amid rising global supply and sluggish demand.
And then there are domestic dampers to consider, such as the looming Goods and Services Tax (GST) as well as high government and household indebtedness.
The impact from the confluence of all these factors is yet to be definitively assessed, quantified or addressed by the government.
And this will be reflected in corporate earnings growth, which has been dismal in the past three straight years — hovering in the low single digit. 2015 will be worse!
In sum, they all point to a difficult year ahead, marked by falling stocks and property prices.
Against such a challenging backdrop, we have carefully selected 10 stocks that we believe will outperform the market. They may even make money in a broadly falling market.
There is a common thread amongst all these companies — they have sustainable business models, good growth prospects, improving productivity and strong balance sheets. In fact, all of our selected stocks are in net cash position save for Complete Logistic Services, which is just marginally in debt.
In an environment of tightening liquidity and rising interest rates — yields on MGS suggest costs are already rising even if Bank Negara Malaysia stands pat on rates — having cash in hand is, often, half the battle won.
Of note, all of the above-mentioned criteria are encapsulated in The Edge Research’s Fundamental Score, which ranges from 0 to 3, with 3 being the best. The Edge Research also has a Valuation Score, which rates the valuation attractiveness of each listed company, on both Bursa Malaysia and SGX, on a similar scale.
These scores and much more are available, for free, at theedgemarkets.com — to help you make better decisions.
The companies on our Top 10 list have Fundamental Scores ranging from 1.95 to 3, with an average of 2.5, and a Valuation Score average of 2.1.
Many of our selected companies are exporters that will benefit from the weak ringgit as well as manufacturers that will gain from low commodity prices, possibly for an extended period.
The biggest driver in the commodity market, China, is slowing after years of hyper-growth, damping demand. At the same time, high prices of the past decade have led to capacity expansions, which are now translating into excess supply in many market segments. The weather has also been kind to crops, resulting in bumper harvests for many including soybean and corn.
Plastic manufacturers (SCGM and Thong Guan) will benefit from lower resin prices — which closely track the oil market — while industrial rubber hose manufacturer, WellCall is gaining from falling rubber raw material costs. All are exporters, as is furniture manufacturer, Homeritz. Incidentally, SCADA systems/solutions provider Willowglen’s main market is Singapore.
There are sectors we avoided. One is, clearly, oil & gas. Whilst some may argue stocks are oversold, it is way too early to quantify the depth of capital spending cuts by oil majors.
Plantation will see continued pressure on crude palm oil (CPO) prices, with falling oil prices (that will hurt biodiesel demand) and ample supply of edible oils globally.
Banks, meanwhile, are looking at slower loans growth and may be vulnerable to higher non-performing loans if operating conditions deteriorate.
Property too is expected to slow down, with tighter mortgage lending, oversupply in certain segments and likely, rising interest rates. This will, to a certain degree, also affect the construction and building materials sectors. But continued government spending on infrastructure projects should temper the negative impact. OKA, Pintaras and Complete Logistic Services are expected to benefit from the latter.
To round up our Top 10 selection, we have thrown in two relatively defensive, high-yielding consumer-related companies. Panamy has a strong brand name and net cash worth almost half of its market capitalisation while Cocoaland has made quite a footprint in regional markets.
Cocoaland Holdings Bhd
Cocoaland is our top pick in the consumer sector. We like the company for its resilient business model - high volume fast-selling candies at affordable prices, strong brand names, capable management, undemanding valuations and high growth potential.
The Edge Research rates Cocoaland Fundamental and Valuation scores of 2.1 and 2.4 out of 3, respectively.
The company is a leader in the fruit gummy market, which accounts for 35% of sales. As the sole producer of fruit gummies in Malaysia, it commands a high margin of about 20%. With exports accounting for 61% of sales, Cocoaland will also benefit from the strengthening US dollar.
The company spent RM135 million on capex, all internally funded, over the last four years. It expanded production capacity for fruit gummy by 160% while warehouse capacity increased by 64%.
Despite the huge capex, its balance sheet stayed strong with net cash of RM23.9 million - underscoring Cocoaland's steady operating cash flow. The stock is trading at a trailing 12-month P/E of 13.1 times and P/BV of 1.2 times. These valuations are inexpensive for a consumer company with strong, growing brands. Dividends totalled 6.5 sen per share in 2013, translating into a net yield of 4.2%.
Complete Logistic Services Bhd
The current environment of weak oil prices should boost the bottom line of Complete Logistic Services (CLS), fuel being a key cost component for the comprehensive logistics services provider. The Klang-based company owns a fleet of eight ships and over 200 trucks.
CLS shifted its focus from shipping to land logistics after competition in the former intensified. Consequently, revenue from land logistics segment grew steadily, at CAGR of 19% from RM27 million in FY March 2007 to RM94 million in FY2014, contributing 77% of revenue and 70% of PAT in FY2014.
Since downsizing its vessel fleet, the company acquired land in Klang to expand its warehousing activities to the West Port area. It is now also an operator in the Nilai Inland Port, offering an exposure to the growing industrial base in the area.
The Edge Research rates CLS a Fundamental score of 2.5 out of 3. Operating cash flows have been positive since listing in 2007. Balance sheet is healthy with net gearing of just 0.04%.
The stock is trading at a trailing 12-month P/E of 7.8 times and a P/BV of 0.8 times. CLS paid interim dividend of 3 sen per share in FY2015, translating into a yield of 4.3%.
Homeritz Corporation Bhd
Homeritz Corporation is a manufacturer of upholstered home furniture - dining chairs, sofas and bed frames - under Original Design (including its own brand, Eritz) and Original Equipment Manufacturer. About 99.3% of its products are sold overseas. Key markets are Asia, Australia, Europe and the US, with receivables mostly in US dollars.
The stock looks attractive for its exposure to the strengthening US dollar, high dividend yield and steady growth.
From FY August 2011 to FY2014, revenue has grown 41.6% from RM89.8 million to RM127.2 million while net profit increased by 87.3% from RM10.8 million to RM20.3 million. Operating margins have been expanding on economies of scale and increased productivity and efficiency.
Management is also upbeat on demand outlook.
The stock trades at a trailing 12-month P/E ratio of 8.5 times, low relative to its growth. Its balance sheet has net cash of RM49.3 million. This is about 24.6 sen per share or 28.6% of the current share price of 0.86 sen.
Lastly, Homeritz has a minimum 40% dividend payout policy. Dividends totalled 5.1 sen per share in FY2014, translating into a net yield of 5.93%.
The Edge Research has given Homeritz Valuation and Fundamental scores of 2.40 and 1.95.
OKA Corporation Bhd
Ipoh-based OKA Corp - one of the largest pre-cast concrete manufacturers in Malaysia - stands out for its consistent earnings, low valuations and higher-than-market average yields.
Having supplied to projects including East Coast Expressway, MRT and LRT, as well as the Pasir Panjang Terminal in Singapore, OKA is well-positioned to benefit from future infrastructure projects such as the MRT 2, LRT 3 and West Coast Expressway.
OKA charted steady revenue growth, from RM103 million in FY March 2010 to RM145.4 million in FY2014. Net margins were fairly consistent in the earlier years but widened to 9.2% in FY2013-FY2014. The uptrend continued into 1HFY2015 with net margin expanding further to 10%, thanks to rising utilisation and economies of scale, cost control and improving balance sheet. As gearing declined from a high of 21.8% in FY2012 to current net cash of RM1 million, so did interest expenses.
The Edge Research rates it a maximum Valuation score of 3.0 and 2.2 for Fundamentals.
It is trading at just 0.89 times book and trailing 12-month P/E of 6.6 times.
Additionally, OKA pays consistent dividends, between 3-3.5 sen per share over the last 5 years. Dividends for FY2014 totalled 3 sen per share, giving a net yield of 4.3%.
Panasonic Manufacturing Malaysia Bhd
Panamy, which manufactures a wide range of electrical appliances under brand Panasonic, is an attractively priced company with stable, steadily growing earnings and strong balance sheet. Between FY March 2010 and FY2014, turnover rose a compounded 7.2% per annum while net profit grew 5.6% annually.
The Edge Research rates it a 2.4 and 2.8 out of 3 for Valuation and Fundamental, respectively.
High dividend yields and a well-established brand presence in Malaysia are definite plus points. The company, which has ridden through multiple financial crises in the past, should be well able to weather what is expected to be a very challenging 2015. It is sitting on net cash totalling RM536 million.
Panamy has, historically, rewarded its shareholders well, with special, interim and final dividends. Total dividends of 69.2 sen per share for FY2014, however, were considerably lower compared to the RM1.41 for FY2013. Even so, this still translates to a yield of 3.7% based on the current share price of RM18.50.
A possible reason for the lower dividend could be expectations of further weakening of the Japanese yen. If so, we could see higher dividends in the near future.
Pintaras Jaya Bhd
Within the construction sector, Pintaras - a leading foundations and piling specialist - stands out for its consistent earnings growth, high margins and net cash of RM140.3 million. The Edge Research rates it a maximum Fundamental Score of 3.0.
The company is currently running at full capacity up to mid-2015. Its orderbook includes the iconic 118-storey Warisan Merdeka. Piling, civil engineering and construction works accounted for 82% of sales in FY June 2014 - and more importantly, earns a smart 35% margin, well above the average construction sector margin of around 10%.
Pintaras attributes this to a confluence of factors. It is a specialist in a niche market. It is very selective when it comes to which project to take on. In particular, the company selects only those that maximise utilisation of its existing fleet of heavy equipment. And after being in the business for 25 years, many of its equipment are already fully depreciated. It has a good track record and reputation and hence, is able to procure materials at attractive terms.
Dividends totalled 15 sen in FY2014, giving a yield of 4.0%. The stock is trading at 1.88 times book with a trailing 12-month P/E of 10.9 times.
SCGM is involved in, primarily, the manufacture of thermo-vacuum formed plastic packing - basically, disposal plastic trays for the food and beverage, electronics & electrical and medical sectors.
Aside from growing demand, the company will benefit from lower raw material cost for plastic resin. As an exporter - sales to Asia, Europe, Oceania and North America accounted for 44% of sales in FY April 2014 - SCGM will also gain from the weak ringgit.
From FY2010 to FY2014, revenue and net profit grew at CAGR of 10.3% and 14.6%, respectively. For the latest 1QFY2015, net profit grew an outsized 13.3% on 6% revenue increase. Net margin widened to 13% from an average of 11.5% in FY2014, boosted by lower raw material cost, increased production and economies of scale.
The company is adding a new plastic cup line that will lift capacity and sales by some 10% next year and planning further automation to improve efficiency.
The Edge Research rates SCGM a high Fundamental score of 3 out of 3 and Valuation score of 2.1 out of 3.
The stock is trading at a trailing 12 month P/E of 12.4 times with ROE of 17.7%. It has a minimum 40% dividend payout policy. Yields totalled 5.2% in FY2014.
Thong Guan Industries Bhd
The slump in crude oil prices - and therefore lower resin raw material costs - coupled with the weakening ringgit are expected to be a boon for Thong Guan.
The company is one of Asia-Pacific's largest producers of plastic packaging, including thin stretch film, garbage bags, PVC food wraps and industrial film. Exports - to Japan, Australia, China and Asean - accounted for nearly three-quarters of sales in 2013.
To cater to future demand growth, it has committed to spend RM100 million - to expand capacity for various product lines, focusing on high margin segments. Annual production capacity is slated to rise by 42% to 170,000 tonnes within the next three years. Currently, Thong Guan is running at 90% utilisation.
The Edge Research rates Thong Guan an above-average Fundamental score of 2.1 and Valuation score of 1.8 out of a maximum 3.0.
The stock is trading at a steep 35% discount to its book value of RM2.87. Trailing 12-month P/E is only 7.1 times - low relative to its prospective growth. It has zero gearing and ROE of nearly 10%.
Dividends were raised from 6 sen in 2011 to 8 sen per share in 2013, translating into attractive net yield of 4.3%.
WellCall Holdings Bhd
Ipoh-based WellCall manufactures industrial rubber hoses used across a broad swath of the economy - for air and water, welding and gas, oil and fuel, automobile, shipbuilding as well as food & beverage sectors.
Earnings grew steadily for the past four years. In FY September 2013, WellCall saw lower revenue - as customers held back purchases in anticipation of lower prices - but still managed to grow profits, thanks to lower rubber costs. In the latest FY2014, both sales and net profit rose - by 11.3% to RM146.4 million and 19.1% to RM29.4 million, respectively.
The current regime of low commodity prices and weak ringgit bodes well for WellCall. Almost 91% of sales are exported, to all over the world. Meanwhile, bulk latex prices have fallen from 536 sen/kg at end-2013 to the current 358 sen/kg.
The Edge Research rates WellCall a maximum Fundamental score of 3 and 2.1 out of 3 for Valuation.
The company is sitting on net cash of RM41 million, which together with steady operating cash flow will continue to support a generous dividend payout. Annual dividends paid have been in a gradual uptrend, net yield totalled 5.35% in FY2014.
ROE has been rising steadily, from 20% in FY2011 to over 35% currently.
Willowglen MSC Bhd
A company that stands to benefit from government infrastructure spending is Willowglen - a leading Supervisory Control and Data Acquisition (SCADA) system provider. The development of mega projects and high-rise buildings in Klang Valley and Johor is likely to provide more business opportunities for its SCADA business.
Its main markets are Singapore and Malaysia, contributing 83% and 17%, respectively, of its FY2013 revenue. Willowglen is well established in Singapore and its major clients include Housing and Development Board of Singapore (HDB), Singapore Power and Public Utilities Board of Singapore, Prasarana Malaysia and Petronas Gas.
Besides a growing SCADA market, Willowglen is fundamentally sound - The Edge Research gives it a Fundamental Score of 2.55 out of 3. Revenue grew at 3-year CAGR of 23.5% from RM54.5 million in 2010 to RM102.6 million in 2013 with consistent EBITDA margin of 20%. Supported by strong cash flows, its net cash stood at RM55.9 million or 23 sen per share as at end-September 2014, up from RM37.7 million in 2010.
The stock is trading at a trailing 12-month P/E ratio of 10.0 times and a P/BV of 1.97 times. Dividend per share was 2 sen in 2013, translating into a yield of 2.7%.
This article first appeared in The Edge Malaysia Weekly, on January 5 - 11, 2015.