THE first half of 2015 concluded with renewed pessimism in the global markets. The continuing turmoil in China’s stock market, Greece’s debt negotiations and the local political uncertainty have cast a gloomy outlook on the FBM KLCI.
In spite of this, Insider Asia’s top 10 stock picks for the year have continued to outperform the benchmark index. As investors began focusing on fundamental value and companies with strong cash flow in times of market stress, the counters have proved to be top performers in terms of capital preservation and dividend yields.
And in terms of gains to date, they have easily outperformed the FBM KLCI, with average gains of 36% (see table). In comparison, the benchmark index has performed poorly, down 2.28% as at July 14.
Additionally, the stocks continue to offer dividend yields that are comparable to blue chips. The average trailing 12-month dividend yield for the 10 stocks is 3.75%, compared with the FBM KLCI’s projected 2015 yield of 3.24%, according to Bloomberg data.
A common thread among IA’s strongest performers is that they are exporters benefiting from the ringgit’s steep decline against the US dollar this year. Companies such as Cocoaland Holdings Bhd, Homeritz Corp Bhd, SCGM Bhd, Thong Guan Industries Bhd and Wellcall Holdings Bhd have substantial exposure to the export markets and their share price gains this year are reflective of their improving prospects.
The weaker ringgit, which is now hovering close to a 16-year low, is set to boost export sales and improve overall profit margins for these companies. This is because other than the weaker ringgit, commodity prices have largely declined in anticipation of weak demand from China, resulting in lower raw material costs.
At the same time, an uptick in demand would enable the companies to realise better margins by increasing their utilisation rates, thus reducing overhead costs.
One such standout is Homeritz (fundamental: 1.95; valuation: 1.50), a manufacturer of high-grade upholstery furniture with export markets in Europe and the US. Year to date, the stock has gained 93.7%.
Homeritz’s outlook remains positive because of the recent stake acquisition in Embrace Industries Sdn Bhd (EISB), making it a wholly-owned subsidiary. EISB posted a net profit of RM11.6 million in FY2014, which means that Homeritz could receive a further earnings boost going forward.
Similarly, SCGM (fundamental: 2.60; valuation: 1.70) has enjoyed a resurgence in interest from investors who are turning bullish on exporters. Sales to Asia, Europe, Oceania and North America accounted for nearly half of total sales in its latest financial year (FY2014).
SCGM manufactures thermo-vacuum-formed plastic packaging such as food containers. Year to date, its share price has risen 89.7%, making it one of the bourse’s top performers among the mid-cap stocks.
Another top performer among IA’s picks is Cocoaland (fundamental: 2.80; valuation: 2). The candy manufacturer received a buyout offer amounting to RM463.3 million from First Pacific Co Ltd, a Hong Kong-listed company controlled by Indonesian tycoon Anthony Salim.
The offer price, which equates to RM2.70 per share, translates into an 80% premium to the stock’s price when it was featured by IA in January. Back then, IA noted that the company had a strong balance sheet, a resilient business model and was cheaply valued, based on fundamental metrics.
Despite their gains so far this year, some stocks are still considered undervalued relative to their sectors. For example, despite boasting one of the highest profit margins in the construction sector, piling contractor Pintaras Jaya Bhd (fundamental: 3; valuation: 2.40) only commands a trailing 12-month earnings multiple of 9.95 times.
In comparison, the Bursa Malaysia Construction Index is valued at 16.65 times earnings, which could imply that investors have yet to fully price in the company’s strong profit track record and consistently high margins.
Willowglen MSC Bhd (fundamental: 2.55; valuation: 0.9) is another company that we believe is similarly undervalued. The telemetry data provider remains flush with funds and is in the process of expanding its business via new R&D initiatives. Its net cash position of RM50 million is about a fifth of its total capitalisation of RM220 million.
The company’s trailing 12-month earnings multiple is 12 times, which is at the low end of the valuation range in the technology sector. The stock carries a dividend yield of 2.2% and has demonstrated a consistent growth in net assets per share over the past five years, which makes it a viable long-term investment opportunity.
However, there is a slight adjustment in the portfolio. Penang-based LED testing firm Elsoft Research Bhd (fundamental: 2.55; valuation: 2.10) has been added due to its strong earnings growth potential and its current attractive valuations (see accompanying story).
Complete Logistic Services Bhd (fundamental: 1.45; valuation: 1.40) has been dropped as its shipping segment continues to be a drag on growth in its logistics segment. In FY2015, the company was hit by a RM12.4 million impairment cost on vessels, wiping out almost all of its net profit for the year. Because of that, it reported a net profit of RM905,000, a sharp drop from RM14.05 million the year before.
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Elsoft Research Bhd Penang-based technology player Elsoft Research Bhd (fundamental: 2.55/3; valuation: 2.1/3) offers investors exposure to the robust growth in mobile devices and the increasing use of LED (light emitting diode) in consumer products. Earlier in January this year, the company completed its transfer to the Main Market and successfully renewed its pioneer status, enabling it to enjoy tax exemption for the next 10 years until 2025. Elsoft’s underlying business has been doing very well. Between 2010 and 2014, revenue grew at a CAGR of 41.4% to RM45.14 million while net profit expanded 50.5% per year to RM20.13 million. Its ROE stands at an impressive 30%. The company runs a lean ship with just 61 employees, which translates into a high productivity of RM740,000 in revenue per employee. Also, Elsoft has a strong balance sheet with net cash position of RM14 million or eight sen per share, which is supportive of its minimum 40% dividend payout policy, and decent yields. Its dividend yield for 2014 was 3.95%. Given historical trends, investors can expect 2015’s dividend to be declared in August. Moving forward, Elsoft plans to expand its customer base and produce LED testing equipment for medical devices, which it expects to boost revenue by 20%. Meanwhile, its associate company, Lesoshoppe, is expanding to Thailand, Indonesia and the Philippines. The stock is trading at a trailing 12-month PER of 13.8 times, which is attractive relative to its strong double-digit growth. |
Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.
This article first appeared in Capital, The Edge Malaysia Weekly, on July 20 - 26, 2015.
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