AS investors continue to place their bets on technology or growth stocks, is there a place for value investing?
Value stocks tend to show poor prospects, hence the market often forecasts worse things ahead and undervalues them. However, they are typically never quite as bad as the market anticipates.
A recent note by Andrew Williams, an equity value investment specialist with UK-based fund manager Schroders, points out that investors of value stocks focus less on a value company’s prospects and more on its current valuation and financial strength.
“Critics of value investing argue that, since the technological innovation often associated with growth stocks is essential in today’s world, companies without it are unlikely to be the top performers in the future.
“It is certainly true that older businesses are less likely to be the fast growers of the future. But this overlooks an absolutely crucial distinction between good companies and good investments,” says Williams.
In a period where market growth is not broad-based and general corporate earnings are dull, TA Investment Management chief investment officer Choo Swee Kee believes that value investing is most appropriate.
“It is also appropriate in a market that has seen a long rally and the prices of most stocks are at heightened levels. Value investing will seek out stocks that are laggards and should have downside protection,” he tells The Edge.
Taking a look at stocks on Bursa Malaysia, growth stocks such as Pentamaster Corp Bhd and ViTrox Corp Bhd have justified the high valuations assigned to them by delivering hefty returns to investors over a period of time.
Still, it is worth noting that 10 years ago, there were some traditional businesses that were assigned low valuations by the market but they have managed to churn out hefty share price gains over the past years. They include furniture maker Lii Hen Industries Bhd, contract manufacturer SKP Resources Bhd and insurance firm Syarikat Takaful Malaysia Keluarga Bhd.
With a focus on stocks that are trading at single-digit price-earnings ratios (PERs) and have reported decent earnings, we look at eight stocks that might be worth a second look from the standpoint of a value investor.
Matrix Concepts Holdings Bhd
Despite tough conditions in the Malaysian property sector, property developer Matrix continues to perform better than the market had expected.
For the first half ended Sept 30, 2019 (1HFY2020), Matrix reported a 10% increase in net profit to RM113.39 million, thanks to higher revenue recognition from the group’s Bandar Sri Sendayan project in Negeri Sembilan and its maiden high-rise property development in Kuala Lumpur called Chambers KL.
Backed by a higher amount of new launches and healthy sales performance, the group’s unbilled sales as at Sept 30 stood at RM1.2 billion, which will be recognised over the next 15 months.
At its closing share price of RM1.92 on Dec 9, Matrix was trading at just six times its earnings and 1.02 times its book value. All four analysts covering the stock have a “buy” call on it, with target prices ranging from RM2.20 to RM2.64.
Hong Leong Investment Bank Research said in a Nov 22 note that it continues to like the company as it is well positioned to ride the affordable housing theme within its successful townships, with cheap land cost and sustained property sales.
This is supported by an attractive dividend yield of 6.7% for FY2020 and 7.6% for FY2021, being one of the highest in the sector, the firm says.
Kimlun Corp Bhd
Engineering and construction services provider Kimlun delivered a 9% growth in net profit to RM41.69 million for the nine months ended Sept 30, 2019 (9MFY2019), thanks to higher construction revenue contribution from the Pan Borneo Highway Sarawak and MRT Line 2 projects.
At its closing price of RM1.23 on Dec 9, Kimlun was trading at 6.7 times its earnings. Kenanga Research, which has an “outperform” call on the company with a target price of RM1.65, notes that it has an outstanding order book of RM1.5 billion, which comprises construction jobs that are anchored mainly by the Pan Borneo project.
“We like Kimlun as a small-cap contractor play, which also offers exposure to the affordable housing segment and rising construction activities in Singapore,” the research firm says in a Nov 29 note.
AllianceDBS Research, in a Nov 29 note, says the company’s valuation remains at a bargain at just five times its forecast FY2020 earnings.
“We continue to like Kimlun as a proxy for the affordable housing sector as well as an expected surge in manufacturing orders from Singapore in 2019,” the research firm adds.
A slump in crude oil prices has not deterred jobs for upstream oil and gas service and equipment company Uzma.
It reported a net profit of RM9.43 million for its first financial quarter ended Sept 30, 2019 (1QFY2020), which was 30% higher than a year ago, on higher revenue recognition for certain projects.
Public Investment Bank Research has a “trading buy” call on Uzma with a target price of 95 sen, which translates into an upside potential of 17% to its closing price of 81 sen on Dec 9. At that price, Uzma is just trading at eight times PER.
“We expect Uzma’s integrated wells solutions contribution to be stronger, particularly from the Pulai A field, various hydraulic workover unit projects in Malaysia, Thailand and China as well as from Setegap Ventures Petroleum Sdn Bhd. Order book stands at RM1.1 billion, with about RM770 million in firm contracts and the remaining from umbrella contracts,” the research firm says in a Nov 28 note.
The company was a winner at The Edge Malaysia Centurion Club Corporate Awards 2019 for highest growth in profit after tax over three years for the energy sector.
Mega First Corp Bhd
Mega First, which owns the Don Sahong hydropower project in Laos, saw its net profit for the nine months ended Sept 30, 2019 (9MFY2019) slump 28% to RM70.49 million on lower construction revenue recognised.
At its closing share price of RM4.76 on Dec 9, Mega First was trading at an undemanding valuation of eight times its earnings.
Maybank Investment Bank Research, in a Nov 19 note, says the decrease in Mega First’s third-quarter earnings was in line with its forecast and that of consensus, as construction profit continues to taper with the construction of Don Sahong at 95% completion as at September.
“We expect 4QFY2019 to be a bumper quarter with potential accretion from the energy test sales. We reiterate a ‘buy’, supported by strong earnings growth expected from Don Sahong when operations commence in January 2020,” the firm adds.
Maybank IB Research has a target price for Mega First of RM5.50, which is a 15% upside potential to its closing price of RM4.76 on Dec 9.
Pestech International Bhd
Integrated electrical power technology company Pestech saw its net profit for the first financial quarter ended Sept 30, 2019, (1QFY2020) surge 94% to RM19.32 million, thanks to higher revenue recognised from its ongoing transmission, distribution and rail electrification projects.
As at Sept 30, the company’s order book balance stood at RM1.5 billion. At its closing price of RM1.24 on Dec 9, it is valued at 8.5 times its earnings.
In its Nov 29 note on Pestech, Kenanga Research says it expects contract flows to start kicking in for the company with the revival of the second phase of the Klang Valley double-tracking project and East Coast Rail Link.
“Pestech should stand a good chance of participating in these projects as it is the only local firm with rail electrification expertise.
“We continue to like this niche utility infrastructure play, which could benefit from the revival of mega projects domestically and the fast-growing energy infrastructure development market in Cambodia,” says Kenanga Research.
The firm has an “outperform” call on Pestech with a target price of RM1.75, which is a 41% upside potential to the counter’s closing price of RM1.24 on Dec 9.
IOI Properties Group Bhd
For its first financial quarter ended Sept 30, 2019 (1QFY2020), IOI Properties saw its net profit grow 22% to RM136.63 million on higher operating profit from development projects in China and the Klang Valley as well as a higher share of profit in joint ventures mainly arising from the sale of South Beach Residences in Singapore.
At its closing share price of RM1.14 on Dec 9, the group was trading at nine times its earnings and a 66% discount to its net assets per share of RM3.40.
The stock is high on the recommendation list of analysts, with all eight brokers covering the counter having a “buy” call on it.
HLIB Research, in a Nov 26 note, says IOI Properties’ unbilled sales stood at RM750 million, representing a cover ratio of 0.46 times, which is an improvement from 0.28 times in 4QFY2019.
“In addition, we note that this has not included the sales to be recognised from the Xiamen projects. With regard to China, we understand that over RMB6 billion worth of gross development value is expected to be launched over the next two to three years (depending on the market) to sustain profit moving forward,” the research firm says.
HLIB Research has a “buy” call on IOI Properties with a target price of RM2.04 — an upside potential of 79% to its closing price of RM1.14 on Dec 9.
“IOI Properties remains a deep value stock with huge land bank and investment properties on the back of attractive P/B (price-to-book) at 0.3 times (industry average of 0.7 times), reinforced by its maturing investment properties and a strong track record,” the firm says.
Casino operator Genting proved it is back in the game in the cumulative nine months ended Sept 30, 2019 (9MFY2019), when its net profit more than doubled year on year to RM1.47 billion due to the absence of an impairment loss taken in 9MFY2018.
At its closing share price of RM5.73 on Dec 9, Genting was trading at nine times its earnings — a far contrast from 10 years ago when the stock was trading at 32 times its earnings.
Nevertheless, analysts are still sanguine about its prospects, with 12 out of 16 analysts covering the stock having a “buy” call on it.
“We believe that Genting continues to offer deep value. As the parent company of Genting Singapore Ltd and Genting Malaysia Bhd, Genting provides a cheaper exposure to both its subsidiaries,” AllianceDBS Research says in a Nov 29 note.
AllianceDBS Research has a “buy” call on Genting, with a target price of RM7.25 — a 27% upside potential to its closing price of RM5.73 on Dec 9.
AffinHwang Capital, in a Nov 29 note, also has a “buy” call on Genting, with a target price of RM7.25.
“We are keeping our ‘buy’ call as we believe its valuation remains attractive, as the holding company discount is still one standard deviation above its past five-year average,” the firm says.
Muhibbah Engineering (M) Bhd
International engineering construction company Muhibbah, which has a build-operate-transfer concession for the development and management of Cambodia’s international airports, saw its earnings for the nine months ended Sept 30, 2019 (9MFY2019) slip 12.7% to RM93.3 million on lower turnover.
At its closing market price of RM2.33 on Dec 9, the counter was trading at 7.9 times its PER.
Most analysts, however, are upbeat about its prospects, with six out of seven who cover the stock having a “buy” call on it.
RHB Research maintained its “buy” call on Muhibbah with a target price of RM3.68 — a 58% upside potential to its closing price of RM2.33 on Dec 9.
“Muhibbah’s 9MFY2019 core profit came in below expectations on weaker infrastructure construction billings.
“However, future earnings growth should be anchored by associate-owned Cambodia Airports (still double-digit growth in passenger volumes) and its crane division’s growth, while its construction performance should remain muted on a sluggish industry outlook,” the research firm says.