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Excellent performance: Malaysia’s stock market was one of the markets in the region that closed 2020 in the positive territory, making it the top performer ahead of Singapore, Indonesia, Thailand and the Philippines.

LAST year will be remembered as one of the most traumatic periods in history for the global economy and stock markets worldwide, no thanks mainly to the Covid-19 pandemic.

The good news is the worst appears to be over, and some stock markets have already recovered all their losses over the year.

Within Asean, Bursa Malaysia is one example.

Malaysia’s stock market was one of those in the region that closed 2020 in the positive territory, making it the top performer ahead of Singapore, Indonesia, Thailand and the Philippines.

While its peers in the region ended last year with losses, the local benchmark FBM KLCI gained 2.42% as of Dec 31 on a year-to-date basis.

This new year continues to present opportunities for investors looking to put the money in Malaysia’s stock market, say three fund managers polled by StarBizWeek.

Affin Hwang Asset Management Bhd director of equity strategies and advisory Gan Eng Peng, Kenanga Investors Bhd executive director and chief executive officer Ismitz Matthew De Alwis and RHB Asset Management Sdn Bhd acting chief executive officer Mohd Farid bin Kamarudin also shared which stocks are on their Top 3 list for 2021.

For Gan, they are plantation giant Kuala Lumpur Kepong Bhd (KLK); manufacturing company Supercomnet Technologies Bhd and chemicals manufacturer Samchem Holdings Bhd.

“For reopening play via commodities, KLK, for manufacturing trade diversion, Supercomnet and Samchem is a bottom up idea, ” he explains.

Ismitz’s top three picks are Supercomnet, retailer Aeon Co (M) Bhd and semiconductor support services provider Frontken Corp Bhd.

“Although the sectorial focus of our research could vary depending on our macro strategy, our philosophy of selecting companies based on in depth bottom-up research remains the same, ” he explains.

“Some our key consideration in stock selection remain the earnings growth potential, sustainability of the company’s business model, quality of management and efficiency of the company’s capital deployment, ” he adds.

As for Farid, his top three picks are glovemaker Hartalega Holdings Bhd, and semiconductor and electronics manufacturing services players Inari Amertron Bhd and ATA IMS Bhd.

“In this volatile environment, we focus on quality companies with resilient business models and reputable management, ” he says.

Below the list of stocks that they expect to outperform this year:

Kuala Lumpur Kepong bhd

Gan: KLK is the fourth largest crude palm oil (CPO) producer in Malaysia. Not a usual name for a top pick given its staid price action. We think this could change.

Besides the obvious higher crude palm oil (CPO) price, which is not reflected in its forward projection, the market has not factored in what’s happening at its associate company Synthomer PLC.

One of Synthomer’s business is selling nitrile latex, a raw material used in nitrile gloves. Synthomer is the world’s second largest nitrile latex supplier after Kumho Petrochemical of South Korea.

There is a back order of up to two years for nitrile gloves, and even longer supply response of three years for nitrile latex capacity growth.

This is creating a shortage that drove up prices, for example, by 90% year on year in November 2020. This division could go from negative contribution in financial year (FY) ended Sept 30,2020, to a significant portion of FY2021 profit base.

Besides, CPO price is currently at a multi-year high and we believe it can sustain well above the RM3,000 level until the first half of 2021, underpinned by strong demand from key importers, India and China, on the back of the vaccine rollout and economic reopening. This kind of prices is not baked into KLK’s current forecast.

Supercomnet Technologies Bhd

Gan: Supercomnet has transitioned from a cable and wire harness manufacturer into a medical consumables contract manufacturer after fully-consolidating its subsidiary Supercomal Medical Products Sdn Bhd (SMP) in 2018.

One of SMP’s key client, Edwards Lifesciences (US$52bil market cap), is a global player in cutting-edge medical solutions for structural heart diseases.

Their key technology is Transcatheter Aortic Valve Replacement (TAVR), which replaces the need for open-heart surgery when valves are replaced. This segment has a long mid-teens growth profile into 2025 for a sizable US$8.8bil addressable market.

Supercomnet eventually added new customers like Copenhagen-listed Ambu A/S (US$8.8bil market cap), which manufactures disposable endoscopes. This medical consumable product reduces risk of infection and the market segment is expected to grow by 20% to 25% to US$3bil by 2025.

We believe this is just the start in Supercomnet’s diversification in customers.

We like Supercomnet for its strong foothold in customers’ medical consumable (therefore recurring) segment, which have long-growth profiles and are a lot stickier than technology suppliers. They should also be adding to this recurring and growing base with new customers of similar profile.

Supercomnet is a re-opening play.

Covid-19 has reduced diagnostic frequency to identify patients with medical disorders and many procedures, and therefore demand, have been deferred.

On the supply side, FDA approvals for new products have been delayed as Covid-related products take precedent.

We like Scomnet for its multi-year growth exposure in medical devices. The warrant usually offers a cheaper entry point.Samchem Holdings Bhd

Gan: Samchem is a small cap regional champion in petrochemical and lubricant distribution with over three decades of operations and 15 years of unbroken profit track record. They take supplies from multinational petrochemical players and provide mass distribution, logistics and technical support – the company is geared towards the region’s industrialisation growth on a recurring basis.

Its long-term partners include ExxonMobil Chemical, Petronas Chemical, BASF and Shell Chemicals.

Growth comes from recently appointed central region distribution for Shell Lubricants on top of existing eastern and northern region distribution. We think they have opportunity to take on southern and east Malaysia region.

It is one of largest petrochemical distributor in high growth Vietnam and it is also gaining traction in Indonesia.

Samchem is ambitiously extending its value chain and moving into adjacent category. This is done by expanding both warehouse and terminal storage capacity to cater to existing and new product range.

Taking advantage of its integrated supply chain infrastructure and new capacity expansion,

Samchem is venturing into adjacent market of inorganic chemicals distribution in view of higher market demand for certain products such as caustic soda.

Chemical prices have been in downward trend since 2018 but we think it has bottomed with some upward potential. Rising chemical prices means there is potential for margin expansion as selling price moves up faster than inventory cost.Frontken Corp Bhd

Kenanga Research: Frontken is a company that provides surface treatment and precision cleaning for the thin film transistor liquid crystal display and semiconductor industries.

With its major customer Taiwan Semiconductor Manufacturing Company (TSMC) holding around 40% of the global semiconductor wafer foundries capacity, the group is poised to tag along and ride the global 5G rollout.

In addition, TSMC has raised its 2020 revenue forecast by around 30%, as compared to its previous forecast of 20%, as it sees higher orders coming in given the accelerated digitalisation trend.

Frontken recorded a net profit of RM21.34mil in the third quarter ended Sept 30, which was 12% higher than the RM19mil recorded in the previous corresponding quarter, as revenue grew on improved contribution from its subsidiaries.

The group said revenue increased 8.9% to RM94.79mil in the quarter under review versus RM87.05mil in the previous comparative quarter on the back of higher revenue and profit margin at its subsidiaries in Taiwan and the Philippines.

In Taiwan, the business experienced a pick-up in volume in the semiconductor space due to higher demand and strong orders.

Hartalega Holdings Bhd

Farid: Hartalega is our preferred pick within the gloves sector. We continue to like the sector, given that the strong glove demand should sustain at least until end-2021.

There is also potentially further upside risk to current earnings, as average selling prices are still trending higher in tandem with the new waves of Covid-19 cases.

Hartalega is the gold standard in glove manufacturing and typically trades at a premium to its peers. ATA IMS Bhd

ATA IMS is the prime proxy to Dyson, as their largest box-build contract manufacturer (35% market share) and filter supplier.

Dyson’s recent announcement of expansion plans in the region should ensure long-term growth for its contract manufacturers. In addition, ATA has also been diversifying its customer base, securing five new customers in the Internet-of-Things segment, which we expect will contribute significantly beginning from the second half of its financial year ending March 31,2021.

Another catalyst is the potential margin expansion from the in-sourcing of its printed circuit board assembly operations.Aeon Co (M) Bhd

KENANGA Research favours the Aeon for its relatively undemanding valuations, decent dividend yield of around 5%, coupled with the anticipation for robust earnings recovery in the financial year ending Dec 31,2021, banking on post-pandemic demand normalisation.

While Aeon’s nine-month 2020 earnings missed the house’s target, recovery momentum observed in the third quarter is expected to continue, premised on the anticipated gradual normalisation in retail footfall for its retailing segment following the easing of movement restrictions.

This will likely be further boosted by the year-end festive promotions in the fourth quarter of 2020.

And while Kenanga Research gathered that the mall occupancy rate remains lacklustre at around 80% (versus the pre-pandemic level of 90%), the property management services segment should continue to be buoyed by gradual recovery in rental collections ahead, as businesses slowly recover post-lockdown.

Aeon’s net profit more than double to RM16.35mil in the third quarter from RM7.32mil a year ago due to improvement in merchandise gross margin.

The company said its earnings were also boosted by a change in marketing mechanics as well as agility to adapt to the current cost structure. However, its revenue dipped by 6.9% to RM989.62mil from RM1.06bil.

Inari Amertron Bhd

Farid: Inari is the purest 5G play in Malaysia through its radio frequency business. It is also a beneficiary of the recovery in the automotive and industrial sectors.

Its various partnerships and joint ventures with new customers will enable new revenue streams. We are “overweight” the technology sector, which we see as a beneficiary of trade diversions and diversification away from heavy reliance on the smartphone segment.

https://www.thestar.com.my/business/business-news/2021/01/02/stock-picks-for-2021

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