Cover Story: Top 12 Stock Picks for 2017





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This article first appeared in Capital, The Edge Malaysia Weekly, on December 26, 2016 - January 1, 2017.

 

AS the year draws to a close, many can now heave a sigh of relief — the equity market has proved to be a challenging beast to tame even for the most seasoned investor. However, the relief will be short-lived as “uncertainty” remains the buzzword in the coming year.

Fund managers and analysts are already expecting several world events next year that will cause more uncertainty. Indisputably, incoming US president Donald Trump’s foreign and trade policies will be closely monitored by the investing community, which is waiting to see if he will fulfil his policy pledges to “make America great again”.

Apart from that, there are also the elections that will be held in several European countries next year. Some fear that the voice of the “anti-EU” may prevail as member countries continue to suffer years of high unemployment and tepid growth.

Maybank Investment Bank Research highlights the risk of more aggressive US Federal Reserve rate hikes as a result of higher inflation and growth expectations from fiscal expansion plans in the US.

“This will, in turn, widen the monetary divergence between the US and the other major economies, especially with the European Central Bank having extended its quantitative easing to end-2017,” it says in a recent report.

On the home front, some have singled out the 14th general election as a factor that could add uncertainty to the local stock market. However, those who believe in an election rally are expecting the polls to get the bulls charging in.

To recap, Prime Minister Datuk Seri Najib Razak hinted at the recent Umno General Assembly that the 14th general election “could come anytime soon”.

Despite the events that could cause market jitters next year, fund managers believe that there are still bright spots.

Plantation is one sector that is starting to look interesting again. This is due to the unexpected rebound in crude palm oil (CPO) prices this year. Year to date, they have risen 36.14% to RM3,123 per tonne, the highest since July 2012. At the peak in 2010, it was RM3,619 per tonne.

According to Inter-Pacific Securities head of research Pong Teng Siew, this is a good time for CPO as prices tend to move up between November and March because of low output.

Maybank IB Research says in a note that it expects CPO prices to start the year on a high but foresees a correction in the second quarter before hitting the bottom in the third when production reaches its peak. The research house says the average selling price forecast for 2017 is RM2,400 per tonne.

“Plantation is a long-term play. Look out for planters with young trees because that is where you will see growth in output,” says Phillip Capital Management chief investment officer Ang Kok Heng.

Construction is another sector worth watching. With massive infrastructure development taking place, such as the mass rapid transit project and Pan-Borneo Highway, and more projects to be implemented over the next two years, construction players are bound to benefit from them.

Significant projects slated for the next two years include the East Coast Rail Line, Kuala Lumpur-Singapore high-speed rail, light rail transit Line 3, Gemas-Johor Baru double tracking and the remaining work for mass rapid transit Lines 2 and 3. There is also the RM30 billion Melaka Gateway trading port, a joint venture by state-funded KAJ Development Sdn Bhd and China-based conglomerate PowerChina International Group Ltd.

“We like pure construction players. There are a lot of contracts not rolled out yet. Furthermore, the weakness in the ringgit will not affect many of these players as they can source their raw materials locally,” says Ang.

Etiqa Insurance and Takaful head of research Chris Eng prefers smaller construction players but cautions that some companies’ profit margins may be thin despite securing jobs.

Meanwhile, the agreement between the oil producing nations and the Organization of Petroleum Exporting Countries (Opec) to cut production is expected to rebalance demand and supply of crude oil and provide some reprieve to oil prices.

Maybank IB Research, which has upgraded the sector to “positive”, believes that it is a good time to “bottom fish” as the sector has seen the bottom, with most stocks having lost much of their value.

“The sector is due for a cyclical recovery, on improving sentiment and operating outlook. We see further rerating prospects should Saudi Aramco’s investment of a 50% stake in Petronas’ RAPID (refinery and petrochemical integrated development) project materialise,” it says.

Crude oil aside, the weaker ringgit has also continued to provide opportunity for export-oriented counters. Ang opines that the soft currency has made Malaysian exports more competitive. This bodes well for the export-oriented companies as well as those catering for both the local and foreign markets.

“Yes, export-oriented counters have benefited from [favourable] foreign exchange, but that is only a short-term gain. I believe that there is demand for Malaysian goods and they have become more competitive with the weaker ringgit. Companies with own-brand products should find themselves on a better footing,” he says.

Etiqa’s Eng says investors should try to buy now and sell by April or May next year, given that most of the closely followed global events will take place in the middle of the year. “Yes, there are definitely more uncertainties next year compared with 2016.” 

 

Tenaga Nasional

Despite posting a commendable 10% y-o-y gain in core net profit to RM7.7 billion in its financial year ended Aug 31, 2016 (FY2016), TNB’s share price has been on a downward trend. At its close of RM13.74 last Thursday, the stock had lost 6.52% from its all-time high of RM14.67, recorded in the middle of the year. However, it was still 6.31% higher y-o-y.

At this level, TNB is valued only at 10.53 times earnings. A report by TA Securities points out that this is one standard deviation away from the group’s historical (since 2000) average of 17.1 times.

The weakness in TNB’s share price is indicative of selling by foreign funds, given the recent depreciation of the ringgit. However, it is important to note that there appears to be plenty of demand for TNB’s shares. Recall that Khazanah Nasional Bhd placed out a 1.5% block of TNB shares at RM14.30 apiece earlier this year.

Moving forward, TNB is one of the few blue chips that near-guarantee stable earnings despite the increasingly volatile economic landscape. After all, under the new imbalance cost pass-through mechanism, all variations in fuel costs are passed on to consumers. Hence, neither a recovery in coal prices nor further depreciation of the ringgit should have a sizeable impact on TNB’s earnings.

This resilience makes TNB one of the few defensive stocks that funds can rely on and it is definitely worth more than 10.53 times earnings. Nonetheless, the recent trend of awarding power projects to industry newcomers may cap some of the earnings growth over the next few years. 

By Ben Shane Lim

 

 

Gadang Holdings

The construction and property developer has lost some of its lustre by becoming selective about its new jobs.

Its net profit fell 20% y-o-y to RM16.7 million in the first quarter ended Aug 31. But of more concern is the 60% y-o-y drop in construction revenue during the quarter as its jobs wound up.

It does not help that Gadang’s tender book, which stood at RM10 billion at the start of the year, has fallen to RM5.2 billion.

But that is not necessarily a bad thing. Its management has always taken a conservative approach to bidding for work, preferring to avoid projects with low margins that cannot justify the risks.

Gadang does not need to bag many projects, just the best ones. With MRT2 now in full swing, Gadang is expected to secure a package, given its performance in constructing viaducts for the first line. A single package would boost the group’s order book by RM1 billion.

Meanwhile, there is the 37km-long LRT3 that Gadang is also bidding for.

At last Thursday’s close of RM1.01, the company is valued at 6.51 times earnings, making it one of the cheapest construction stocks on the market. The average earnings multiple in the sector is 14 times.

Beyond construction, Gadang has a sizeable property development arm. This year, the group became development partner for the 24.08-acre Kwasa Damansara township that has an estimated gross development value (GDV) of RM700 million. This is expected to start contributing to earnings in 2018. — By Ben Shane Lim

 

Kerjaya Prospek Group

A relatively new name on investors’ radar screens, the company is the product of a backdoor listing by Datuk Tee Eng Ho. The bulk of its construction business worth RM438 million was injected into it at the beginning of the year. It also came with an order book of RM2.7 billion and a profit guarantee of RM150 million over three years up to FY2018 ending Dec 31.

Based on its closing price of RM2.08 last Thursday, Kerjaya Prospek had a market capitalisation of RM1 billion, valuing it at 11.55 times earnings. The company’s adjusted earnings per share for the year is estimated at 18 sen.

Kerjaya Prospek is not a mere asset injection. This year, it managed to replenish its order book with RM1.5 billion worth of jobs, boosting the outstanding amount to RM2.89 billion and improving its earnings visibility. The company should be able to continue to fill its order book, thanks to the projects of its existing clientele, such as S P Setia Bhd’s Setia Sky Seputeh (GDV: RM950 million) and Eastern & Oriental Bhd’s Puro Place (GDV: RM800 million), notes Kenanga Research in a report.

Kerjaya Prospek is also attractive for its cash-rich balance sheet, which is uncommon among its peers. The company still has a cash balance of RM109 million after paying a four sen per share dividend this year, which works out to cash per share of 21.4 sen. — By Ben Shane Lim

 

 

Sarawak Oil Palms

SOP’s forward price-earnings ratio (PER) of 15.42 times is undemanding, especially compared to the average 2017 forecast PER of 19 times of its mid-cap peers.

The planter’s proposal to fully acquire Shin Yang Oil Palm Sdn Bhd for RM873 million in July would add 47,000ha of plantation land to its land bank, of which 23,798ha are planted with oil palm and 6,772ha are unplanted. The average tree age in Shin Yang Oil Palm’s plantations is seven years, which would reduce the average age of SOP’s trees to 10.1 years post-acquisition from 11.1 years at present.

It is worth noting that Shin Yang Oil Palm is being acquired from SOP’s major shareholder, Shin Yang Holding Sdn Bhd.

“We believe the young age profile of the acquisition and maturing area of about 2,200ha between 2017 and 2019 should contribute to above-average fresh fruit bunch growth from FY2017E onwards,” says Kenanga Research in an October report.

To fund the acquisition, the planter issued 128 million renounceable rights shares on the basis of two for every seven SOP shares held. The rights issue was priced at RM2.80 apiece, below SOP’s market price.

Despite a rebound in crude palm oil prices, SOP lagged behind its peers. At its close of RM3.71 last Wednesday, the stock had declined 8.65% year to date. — By Esther Lee

 

 

TSH Resources

The mid-cap planter was among those that suffered from the effects of El Niño this year. Nevertheless, analysts are expecting production to improve going forward.

For the cumulative nine months ended Sept 30, TSH Resources recorded a net profit of RM81.6 million after stripping out foreign exchange gains and other exceptional items. About 80% of its revenue and profit is derived from its plantation business while the remaining 20% comes from its wood-product manufacturing and bio-integration divisions.

It is worth noting that TSH Resources’ crude palm oil extraction rate is 21%, above the industry average of 20.46%. Its fresh fruit bunch yield is high at 24.7% per hectare compared with the industry average of 18.48% while its average tree age is young at eight years.

The planter has 67,853ha of unplanted land, which should sustain its growth over the next 10 to 14 years, says BIMB Securities Research.

TSH Resources has proposed to privatise its listed but loss-making subsidiary, Ekowood International Bhd, in which it holds a 67.46% stake. Analysts believe the privatisation will have negligible impact on the planter’s shareholders.

At its closing price of RM1.87 last Thursday, the stock had lost 2.55% year to date. — By Esther Lee

 

 

MKH

Based on a 2017 price-earnings ratio forecast of 6.65 times, the plantation and property player is a steal for investors, especially since it is expecting the earnings of its plantation division to double next year on the back of stronger crude palm oil prices and better yields.

The trees in MKH’s 15,400ha plantation in Kalimantan, Indonesia, are expected to reach the peak of maturity next year. According to AllianceDBS Research, the estate is expected to achieve a yield of 29 tonnes per hectare, which the research house deems impressive, given the average tree age of seven years.

The company plans to purchase 2,000ha of plantation land near its existing estate in Indonesia for RM15 million. This would increase its plantation area to about 18,000ha.

As of now, the company’s largest contributing segment is still its property division, which accounts for 70% of its revenue. MKH has not been spared the effects of a soft property market. However, its focus on providing affordable homes resulted in unbilled sales of RM827.5 million as at Sept 30, which should keep the group going for 1½ years.

The company has a sizeable land bank in the Kajang/Semenyih corridor, which will see it benefit from the completion of the MRT lines next year.

MKH recently proposed a cash call followed by a bonus issue. Closing at RM2.86 last Thursday, the stock had gained 34.47% year to date. — By Esther Lee

 

 

SamChem Holdings

In contrast to the general trend of disappointing corporate results, SamChem’s earnings are back on the growth path. It posted a net profit of RM11.48 million for the nine months ended Sept 30, 2016, up 48% from the previous corresponding period, while revenue grew 8.3% to RM483.7 million.

Its management is confident of sustainable earnings growth, thanks to rising demand for petrochemicals in Asean, especially Vietnam and Indonesia, where manufacturing plants are sprouting up.

“Sales volume is growing 30% to 40%. The [growth] pattern is likely to continue, if not become stronger,” its CEO, Datuk Ng Lian Poh, told The Edge in an interview. According to him, selling prices have also stabilised.

The homegrown speciality petrochemicals distributor has a foothold in Malaysia, Indonesia and Vietnam. With a market capitalisation of RM130 million, it evolved into a leading player in Asean after the consolidation of the regional industry in recent years.

Ng believes there are exciting prospects for the petrochemicals industry in Vietnam and Indonesia. However, SamChem is not just targeting these two countries but the whole of Asean with its 450 million population. Demand for petrochemicals usually grows in tandem with increasing affluence.

Given its current scale, SamChem forms part of the supply chain of many MNCs that have manufacturing facilities in the region. Furthermore, the high barriers to entry are advantageous to the company.

SamChem’s earnings per share for 9MFY2016 was 8.44 sen. Based on an annualised EPS of 11.25 sen, the stock is trading at 11.28 times. — By Kathy Fong

 

 

Hong Leong Industries

At its closing price of RM9.38 last Thursday, the company’s share price had gained 65.8% year to date. However, it was trading at a low 2017 price-earnings ratio forecast of 10.95 times.

HL Industries has two core businesses — the manufacturing and selling of fibre cement and concrete roofing products under its Hume brand and the more exciting business of manufacturing and trading Yamaha motorcycles in Malaysia and Vietnam through its 24% associate stake in Yamaha Motor Vietnam Co Ltd.

Thanks to Vietnam’s fast-growing economy, many feel HL Industries is facing exciting days ahead. After all, the country has a young population of over 90 million, the vast majority of whom use motorcycles as their primary mode of transport.

In its first quarter ended Sept 30, the company registered year-on-year revenue growth of 9%, attributable to strong sales of motorcycles and ceramic tiles. Net profit surged 44.5% to RM64.77 million on higher contribution from motorcycle sales. HL Industries’ Vietnam associate contributed RM30.7 million to earnings.

In fact, HL Industries’ net profit in FY2016 jumped 42.7% year on year to RM247.22 million due to a higher contribution from its Vietnam associate.

Kenanga Research says in a report that the company’s Yamaha motorcycles are enjoying increasing demand in Vietnam as a result of effective marketing strategies. Currently, Yahama motorcycles command a quarter of the Vietnamese market while Honda dominates 70% of it. — By Esther Lee

 

 

Kawan Food

Well known for its frozen paratha, the company saw its earnings climb in its latest two quarters after a dip in the first quarter. For the cumulative nine months ended 

Sept 30, its revenue increased to RM144.3 million, up 15.6% from a year ago, as it saw higher sales across all regions, save for Europe, while net profit registered a 2.8% growth to RM25.79 million.

More than 60% of Kawan Food’s sales is derived from its export markets. The company has a strong following in the US, which accounted for 34% of its sales in the last nine months of its financial year.

CIMB Research says in a report that steady sales in the domestic market also suggest that the frozen food manufacturer’s local business has recovered from the impact of the Goods and Services Tax.

As at Sept 30, Kawan Food had a cash pile of RM67.58 million, and it declared a special dividend of 3.5 sen per share in November. This was on top of a 2.5 sen per share interim dividend that was announced in its third quarter results.

At a 2017 price-earnings ratio forecast of 29.92 times, many would consider Kawan Food’s valuation lofty. However, the potential of better sales in its export markets, given that Malaysian exports have become more competitive with the weakening ringgit, could be a reason to give Kawan Food a second look. — By Esther Lee

 

 

E.A. Technique (M)

It may not be hard to fathom why this oil and gas stock had tumbled nearly 47% year to date as at last Thursday. The prolonged industry downturn saw it slip from its peak of RM1.46 in August last year to a record low of 45 sen at end-November. It bounced back to 59 sen last Thursday but was still trading below its 2014 initial public offering price of 65 sen.

Some fund managers opine that the counter has been oversold, given its high earnings visibility compared with its peers in the oil and gas industry. But its management must be puzzled at the selling pressure on the stock, although the company receives steady recurring income from its long-term charters.

E.A. Technique managing director Datuk Abdul Hak Md Amin told The Edge that it was business as usual at the company despite the oil rout. “We are less affected by the downturn in the oil and gas industry because our clients are mainly in the mid and downstream segments, such as petrochemical companies and refineries,” he said, adding that the utilisation of the company’s fleet of vessels was more than 90%.

Furthermore, its vessels are chartered for transporting products, like gasoline and methanol, in the region. Thus, the risk of contract termination is low because the demand for such materials remains steady.

For the nine months ended Sept 30, the company posted a higher net profit of RM30.49 million, or 6.05 sen per share, against RM26.19 million, or 5.2 sen per share, a year ago. In the meantime, the new vessels coming on stream with charters are expected to boost its earnings. — By Kathy Fong

 

 

EG Industries

The Kedah-based company is a growth stock despite the current harsh economic climate. A new substantial shareholder brought change to the company, enabling it to climb the value chain by providing box-building and reap the benefits.

Box-building refers to end-to-end manufacturing services that start at designing and end at the shipping of the completed products to end users. EG Industries has graduated from being just an original equipment manufacturer. It now serves world-renowned electrical and electronic brand names in several industries, including consumer electronics, ICT, medical, automotive and telecommunications.

In FY2016 ended June 30, EG Industries posted a pre-tax profit of RM19.7 million, down from RM23.63 million the year before. However, it had booked a disposal gain of RM15.38 million in FY2015. Excluding the extraordinary gain, the group’s pre-tax profit would have been RM8.24 million that year.

The company’s growth momentum continued in its 1QFY2017, with pre-tax profit rising 41.6% year on year to RM7.14 million.

“We like EG Industries for its gradual transition into a vertically integrated EMS (electronic manufacturing service) player through its continuous expansion into the higher margin, full-assembly services segment, and its projected three-year core earnings CAGR of 40%,” says UOB-Kay Hian. The research house sees the company’s net profit ballooning to RM30.6 million, or 11.4 sen per share, in FY2017 and RM36.7 million, or 13.6 sen per share, in FY2018.

EG Industries’ share price was hovering in a tight range of 80 sen to 90 sen for most of the year. — By Kathy Fong

 

 

Kimlun Corp

The Johor-based company has been a beneficiary of the property boom in the state. While having been involved in a large number of residential projects, Kimlun has also taken on infrastructure jobs in Johor. However, it has risen to prominence for manufacturing segmental box girders for the MRT project under its manufacturing division.

At its near-record-high closing price of RM2.14 last Thursday, Kimlun’s share price had surged 56% year to date. However, its valuation, at 8.23 times earnings, is still not stretched.

In the nine months ended Sept 30, the company’s net profit rose 17% year on year to RM57.7 million. Interestingly, revenue fell 14%, primarily due to lower contributions from the construction segment. The fall was compensated for by higher margins.

Kimlun bagged RM1.1 billion of new construction jobs this year (compared with RM700 million in FY2015), boosting the group’s order book to RM1.93 billion.

Its manufacturing segment, meanwhile, saw its orders double to RM300 million, driven by a RM200 million contract to supply segmental box girders for MRT2, which was awarded in March. Moving forward, the group is expected to bag the contract to supply tunnel lining segments for MRT2 as well.

Kimlun also supplies pre-cast concrete products to Singapore. It is diversifying its offerings, now also supplying Singapore with rail sleepers and parapet walls. As a result, the company has benefited from the weaker ringgit.

Kimlun has paid dividends consistently and is expected to declare a dividend of 6.8 sen this year, for a yield of 3.27%. At the same time, the group has a relatively healthy net gearing of 9.9%. — By Ben Shane Lim