Cover Story: Stocks do well despite volatility

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Despite the volatile stock market, the basket of “20 stocks to watch”, which The Edge selected for the 2008 bumper issue based on analysts and fund managers’ recommendations, managed a credible performance.

Out of the 20 stocks, 17 saw improvements in their share prices between Dec 31, 2008 and April 9, with 12 stocks gaining more than 5%. 

Average gains were 12.6%, outperforming the 4.7% gain in the benchmark Kuala Lumpur Composite Index (KLCI), which rose from 876.75 points on Dec 31 to 917.89 points last Thursday.

Construction giant IJM Corp Bhd was the top gainer, having risen 61.4%, followed by Top Glove Corp Bhd (up 50%), Malaysian Bulk Carriers Bhd (MBC, up 41.5%) and IJM Land Bhd (up 38.1%). “The selling (for these counters) was overdone in the first place. These stocks have fallen to unjustifiably low levels that made such a rebound possible,” says a fund manager at a boutique investment firm.

For instance, MBC, which had a cloud hanging over it due to the severe contraction in the shipping business, fell to RM2.39 late last year, despite its net cash holdings of RM1.06 per share.

Meanwhile, IJM Corp, then at around RM2.80, was priced at only half its book value of RM5.60. It was only recently that the announcement of a new round of government pump-priming efforts lent a springboard to IJM to bounce from its low.

The 18% gains chalked up by plantation giant IOI Corp Bhd, year to date, came within expectations. However, the pleasant surprises were from KLCC Property Holdings Bhd and KPJ Healthcare Bhd, which posted decent double-digit gains of 12.9% and 12.5% respectively, year to date. These stocks were usually deemed unexciting in terms of news flow.

As anticipated, large-cap counters perceived as “very safe” and resilient, albeit mundane, managed to produce only moderate returns.

For instance, consumer stock Nestlé (M) Bhd, power player Tanjong plc and pay-TV operator Astro All Asia Networks plc saw their share prices gaining only 6.5%, 6.8% and 1.4%, respectively, since the beginning of the year. However, these counters are known to pay decent, if not generous, dividends, even during bad times. This could bump up shareholders’ total returns, apart from share price gains.

A major let-down among our 20 stocks was Resorts World Bhd, which gained only 0.4% year to date. While the company was generating healthy cash flow and was sitting on a net cash of RM4.56 billion, fund managers were concerned about management’s lack of indication on how it might utilise the cash.

It was quite unexpected that the top loser in our selection was Axiata Group Bhd (formerly known as TM International Bhd). To reiterate, the stock was selected because it was then priced at a 50% discount to its peer Singapore Telecommunications Ltd, in terms of enterprise value over Ebitda, which offered hope of a re-rating. But, that was not to be. Overshadowed by its massive rights issue exercise and concerns over its overseas ventures, the stock lost 25%, with its share price falling from RM2.47 at the beginning of the year to RM1.85 last Thursday.

What now?Going forward, as some fund managers put it, one has to make a decision on whether to hold on to under-performers, take profit from the top gainers or stick with some of the stocks and hope for further gains.

Drawing on how the 20 stocks have performed, one can reach a conclusion that higher rewards are commensurate with higher risk.

“With the picture becoming clearer now, and if you believe the market is going to recover further, it is time to take on higher risks, rather than focusing on safe stocks that are resilient, but have limited upside potential in the months ahead,” says a fund manager with a boutique investment firm.

With that in mind, she says stocks like Quill Capita REIT, which was among our 20 stocks to watch last year, should take a back seat. The REIT’s price has fallen 8.7% year to date, which almost wiped out a one-year dividend return from the stock.The same principle applies to stocks such as Astro and Bintulu Port Holdings Bhd. 

Apart from its strong fundamentals and attractive dividend yields of about 7%, Bintulu in general is a defensive stock and not suitable in a rising market, opines the fund manager.

“For Astro, I think it lacks near-term catalyst, for the time being, pending clearer company direction on charting a more sustainable and growing business model. At this stage, its domestic business is maturing while it is pouring huge investments in overseas ventures that are still loss-making,” says Scott Lim, CEO of MIDF Amanah Asset Management.

While other big caps like Resorts World and YTL Corp Bhd have underperformed the market, they may be worth holding on to. There was recently a re-rating on casino counters in the region, including Resorts World, and investors are expecting the YTL Corp group to undertake some corporate exercises within the group or externally, which may spur interest in the stock.“For Nestlé and Tanjong, the growth is slow, but dividends are steady. Besides, their share price will normally go up in tandem with the KLCI, which allows for capital appreciation,” says the boutique investment firm fund manager.

On stocks that have had a fantastic run since the beginning of the year, such as IJM Corp, Top Glove and IJM Land, investors may be tempted to take some profit, realise gains and re-deploy their funds elsewhere, some fund managers say.That said, Lim of MIDF notes that IJM Corp is worth keeping for a longer term as the construction giant is in a strong position to benefit from a recovery in the economy, due to a capable management team and the fact that it is not burdened by soured projects.

“Construction-related stocks normally take the lead when there is a recovery in the local stock market, and bear in mind that we are still at a very early stage of a recovery, so there is still a long way to go for IJM,” he adds.  Analysts see the recent rally in IJM Land’s share price, though significant at 42% year to date, as merely bringing the stock closer to its book value of around RM1.34 a share.

Other prospects With construction stocks like IJM Corp and WCT Bhd on a rally, some fund managers say it may be time to have a relook at steel counters such as Ann Joo Resources Bhd (share price: RM1.30, up 10.2% year to date) and its smaller peer Malaysia Steel Works (KL) Bhd (share price: 71 sen, up 10.1% year to date). The counters are currently trading at 26% and 68%, respectively, below book value.

Both companies are deemed to have good corporate governance, strong balance sheets and capable management. They may benefit from a recovery of construction activities both locally and abroad — especially China, which is expected to drive up the demand and prices of steel products in the region.

In general, local steel outfits such as Ann Joo, Kinsteel Bhd, Perwaja Holdings Bhd and Southern Steel Bhd had in 4Q2008 made provisions for hundreds of millions in losses on inventories bought or produced at higher cost. These players stand to benefit from further improvements in steel prices and demand, analysts say.

On the other hand, Choong Khuat Hock, head of stock research and partner at Kumpulan Sentiasa Cemerlang Sdn Bhd, favours mid-cap stocks, such as job-search website operator JobStreet Corp Bhd (share price: RM1.03, down 19.5% year to date), property developer Glomac Bhd (share price: 55 sen, up 11.1% year to date), as well as plantation outfits IJM Plantations Bhd (share price: RM2.28, up 17.5% year to date) and TSH Resources Bhd (share price: RM1.52, up 12.6% year to date).“JobStreet has a very low cost structure and a highly scalable business model. It will benefit when companies start hiring again,” Choong says.

He picks Glomac over other property players because it had pre-sold the bulk of its high-end properties before the crisis. In addition, he says Glomac has a practice of giving out good dividends to shareholders.

Mid-size plantation outfits like IJM Plantations and TSH Resources, though with their share prices already up more than 10% year to date, are still trading at low teens forward price earnings. Choong says these companies are ripe for further upside when valuations for plantation sectors improve along with the surge in crude palm oil prices.

For big-cap players, a fund manager say it may be worthwhile to revisit Telekom Malaysia Bhd (share price: RM3.64, up 18.2% year to date), pending its capital repayment of RM3.51 billion or 98 sen a share to shareholders. Stripping out the capital repayment of 98 sen from its current share price, Telekom is now trading at 7.9% gross dividend yield based on the estimated dividend per share of 21 sen a year in FY2009 and FY2010, according to analysts.

This article appeared in the Cover Story page,The Edge Malaysia, Issue 750, April 13-19, 2009