Friday 29 Mar 2024
By
main news image

AT the beginning of this year, InsiderAsia came up with a list of stocks — our “Top 10 stocks for 2015”.

This basket of stocks was carefully selected on the belief they will outperform the market, even a falling one, after taking into account the then prevailing circumstances such as weakening of the ringgit, drop in oil prices and imminent implementation of GST.

Five months into the year, this portfolio of stocks has indeed outperformed the broader market, by far — gaining 29.9% against the FBM KLCI’s 0.8% decline.

We had been cautious on the market’s outlook back then. The broader market, we believe, was overvalued. Corporate earnings had failed to mirror gains in share prices over the past few years. The two subsequent reporting seasons, for 4Q2014 and 1Q2015, have not provided any evidence to the contrary.

And it certainly appears that many investors share our view. Retail investors, in particular, have moved to the sidelines in droves, and were net sellers in the market, so far this year.

Holding cash is the safest bet, but not necessarily the wisest. Bank deposit rates have hardly budged — a 12-month fixed deposit currently attracts 3.3–3.45% returns from the largest domestic banks — even though “real” inflation is rising, especially post-GST. In essence, many savers are looking at negative real interest rates (returns).

And it is looking increasingly likely that interest rates will stay low for some time. Among the developed countries, the eurozone and Japan have every intention to keep borrowing costs near zero — to support their nascent, and fragile, recoveries.

The US, which was widely expected to be the first major economy to raise rates, has all but taken this option off the table, at least until late 2015, on the back of the recent raft of mixed data. Meanwhile, developing countries, led by China, are all rushing to cut rates to support flagging growth.

Bank Negara has, so far, resisted a move to follow suit, perhaps with an eye on inflation, the ringgit and capital outflows. On the other hand, the probability of an imminent rate hike has narrowed significantly over the past few months. For starters, there is no pressure to do so as the low interest rate environment persists, globally.

On the domestic front, with GDP expected to weaken going forward, accommodative monetary stance is the policy of choice. High corporate and household indebtedness also means the central bank will be mindful against ruining the balance sheets of banks, companies or households.

Against this expected backdrop of persistent low interest rates, we have come up with a second portfolio — the InsiderAsia Income Portfolio.

For this portfolio, we have selected 15 stocks that have track records of paying above market average dividends — and most importantly, which are expected to be sustainable for the next 2-3 years, at least.

In times of heightened uncertainties, capital preservation is key.  As such, we have chosen companies with strong balance sheets, most are in net cash positions, whose businesses are expected to be fairly resilient with steady cashflow generation as well as a track record of good governance — even if their prospects for high growth is modest.

Unsurprisingly, the share prices for most of these high-yielding stocks have demonstrated comparatively low volatility relative to the market, historically-speaking. This is commonly measured as the beta. A beta of more than 1 means the stock is riskier than the market.

The weighted average beta of our Income Portfolio is 0.64 — meaning prices should see less gyration compared with the FBM KLCI, if history is any guide.

Certainly, we do not presume the Income Portfolio will outperform the Top 10 stocks portfolio. The latter is a mix of growth and high-yield stocks, and carry higher risks — and therefore, should give greater returns. But we fully expect returns on the Income portfolio to better bank deposit rates, at the very least.

We view this portfolio as a longer-term holding. Hence, we are unlikely to be making many transactions. Please do catch our update in the first issue of The Edge Malaysia every month.

In addition to an update on the portfolio’s returns, we will also highlight some of the companies in the portfolio, in particular those we foresee to have dividends coming up in the near future. In this first issue, we feature Bursa Malaysia and Perstima.

Incidentally, Magnum has just announced a first interim dividend of 5 sen per share, which goes ex-entitlement on June 10, the same as that in the previous corresponding period. Meanwhile, Kim Loong and Crescendo have previously announced dividends of 6 sen and 5 sen per share, respectively. Both stocks will trade ex-entitlement on August 10.

Pshaan-Sadur-Timah-Msia_Bursa-Malaysia-Bhd_Charts_pg12_1069_theedgemarkets

Bursa Malaysia

Bursa (fundamental: 2.3/3, valuation: 1.3/3) is expected to announce 2Q15 earnings results — and interim dividend — sometime mid-July. Earnings are likely to be flattish from the immediate preceding quarter, given the cautious investor sentiment and unexciting trading volume.

Nevertheless, we like Bursa as a comparatively defensive, high-yielding stock. It is a monopoly with relatively resilient business model, longer-term growth prospects, net cash position and a track record of paying excess cash back to shareholders.

Whilst growth will be dependent on, and driven by, higher trading volume – for both securities and derivative products – Bursa has a strong base of recurring income that includes listing fees and charges for information and depository services. This relatively stable stream of income, including interest income, is sufficient to cover some 90% of current operating expenses (excluding depreciation).

The company is sitting on cash totaling some RM271 million with another RM31 million in short-term investment securities. We estimate an excess cash of approximately RM100 million, after taking into account working capital and clearing guarantee requirements. Capital expenditure is likely to be low in the next 2-3- years, with the company having completed upgrades to most of its systems.

The strong balance sheet should ensure a continuation of high dividend payout going forward. Bursa paid special dividend of 20 sen per share in 2013 and 2014 – on top of regular dividends totalling 32-34 sen per share. It is quite likely to continue paying some level of special dividend this year.

In terms of future growth prospects, Bursa is the world’s largest palm oil futures trading hub and has a niche market in Shariah-compliant products. The average number of derivative contracts traded daily has doubled since the migration to CME Globex electronic trading platform. Meanwhile, contributions from Bursa Suq Al-Sila (BSAS) have been growing rapidly, albeit from a small base, on increasing utilization of the commodity trading platform and sukuk issuance by both local and foreign participants.

Perstima

Similarly, we believe that Perstima (Fundamental: 2.05/3, Valuation: 1.4/3) will be able to maintain its attractive, higher-than-market average yields — even if its growth prospects in the immediate term is muted.

Operating conditions is, and will probably stay, challenging due to aggressive importation of tinplates from China and South Korea as well as competition from alternative packaging materials and rising costs.

Nevertheless, earnings held up. For FYMar2015, net profit was up 5% on the back of just about 1% growth in sales, lifted by higher selling prices, volume demand and partial reversal of inventory provisions made in the previous financial year.

Importantly, the company generates steady positive free cashflow and has been building cash. Net cash stood at RM114.9 million at end-March, up from RM35.8 million in FY2010. This translates into cash of RM1.16 per share or a substantial 26% of its current market capitalisation.

Perstima has proposed a final dividend of 20 sen per share for FY2015, on top of the 15 sen per share interim dividend already paid in December. Total dividends are the same as that paid in FY2014, translating into a payout ratio of 82%. This gives shareholders a generous net yield of 7.9% at the current price of RM4.43.

Insider-Asia-Income-Portfolio-table_pg12_1069_theedgemarkets

This article first appeared in The Edge Malaysia Weekly, on June 1 - 7, 2015.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share