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Small caps power ahead

DRIVEN by retail investors, small-capitalisation (cap) stocks in Malaysia have continued their run-up from last year into the first few months of 2021. The segment, comprising stocks with less than RM2bil in market value, has also outperformed its big-cap counterpart on the local bourse.

As of Thursday, the FBM Small Cap Index had risen about 10% year-to-date (ytd), while the main FBM KLCI Index, which is made up of the 30 companies with the biggest market cap, had lost 1.2%.

According to market observers, small-cap stocks will likely still be able to continue their uptrend despite having already staged a relatively long rally, thanks to the robust participation of retail investors in the equity market.

“Many retail investors are drawn to small-cap stocks, in part, because these counters appear cheap and affordable, even though that does not necessarily mean they are undervalued – this is particularly true for beginners, ” one analyst tells StarBizWeek.

“Having said that, there are hidden gems in this segment. Although small-cap stocks tend to be more volatile and riskier, they may offer higher growth potential relative to large-cap companies, ” he adds.

Similarly, CGS-CIMB Research analyst Walter Aw notes that the small-cap sector has the potential to continue providing “alpha”, or excess return on investment, for investors.

“We remain positive on Malaysia’s small-cap sector.

“We believe that this sector will continue to appeal to investors in the long run, as it provides undiscovered growth stocks that could yield higher earnings growth than the FBM KLCI, ” he explains.

In his recent report, Aw points out that improving earnings prospects and rising participation from retail investors in the equity market are the main drivers of the uptrend in the FBM Small Cap Index.

“In contrast, we attribute the weak ytd performance of the FBM KLCI to the decline in the share prices of glove-related counters; concerns over political uncertainties and the movement control order (MCO) 2.0 that was imposed in January 2021, ” he says.

CGS-CIMB last week hosted 21 companies and 145 clients from 65 institutions at its third small- and mid-cap corporate access day. The participating companies come with a market cap of RM98mil to RM2.1bil.

Of the 21 companies, only five were under its coverage, namely, Aemulus Holdings Bhd, CCK Consolidated Holdings Bhd, Innature Bhd, Lee Swee Kiat Group Bhd (LSK) and Awanbiru Technology Bhd (formerly known as Prestariang Bhd).

CGS-CIMB currently recommends “reduce” on Awanbiru, and “add” on the other four stocks.

Other than the above-mentioned stocks, the brokerage also recommends “add” on the following small-caps: Berjaya Food Bhd, Bermaz Auto Bhd, EITA Resources Bhd, Karex Bhd, Kawan Food Bhd, Mah Sing Group Bhd, Media Prima Bhd, Pharmaniaga Bhd, Star Media Group Bhd, Ta Ann Holdings Bhd, and WCT Holdings Bhd.

All is not lost for big-cap stocks despite their sluggish performance ytd.

Analysts note that the improving corporate earnings as the economy gradually bounces back from the Covid-19 fallout will help lift investor sentiment towards big-cap stocks. This points to a potential upside for the FBM KLCI.

Kenanga Research, for one, expects the FBM KLCI to end at 1,745 points by end-2021. This is based on a forward price-to-earnings ratio (PER) of 15.6 times to the FBM KLCI’s projected 2022 earnings per share (EPS) of 111.8 sen.

The brokerage is “overweight” on the automotive, banking, building material, construction, gaming, real estate investment trusts (REITs), rubber gloves, technology and utility sectors.

UOB Kay Hian Research, on the other hand, expects the FBM KLCI to end at 1,680 points by the end of the year, citing the limited downside of glove stocks following the recent selldown, and the fact that the market would be pricing in much more of the economic reopening effects as the nation’s Covid-19 vaccination programme accelerates in the second half.

Meanwhile, TA Research expects the buying frenzy into the undervalued blue chips, especially banks, to lift the FBM KLCI towards 1,830 by the end of the year.

“We maintain our positive view on the market in anticipation of economic and corporate earnings recovery with the progress in Covid-19 vaccinations globally, strong commodity prices and the potential return of foreign shareholders due to the FBM KLCI’s relatively attractive consensus 2022 PER valuation of 13.7 times versus its five-year average of 16.3 times and comparable peer’s 14.2 times, ” the brokerage says.

TA Research argues that while the noise about rising inflation and expectation of monetary tightening will increase in the coming quarters with improving economic outlook, one should not miss the forest for the trees.

“Equities are a good hedge against inflation. The higher demand and better pricing power should boost nominal sales and negate the impact of rising costs, leading to better profits, ” it explains.

It recommends a “buy” on undervalued blue chips and recovery plays in the banking, gaming and property sectors and commodity stocks in the oil and gas and plantation sectors, while nibbling stocks in the telecommunications and technology sectors that have benefitted from the “new norms” created by the Covid-19 pandemic and will continue to benefit from disruptive technologies.

Among its top-buy big-cap stocks, with a market cap above RM10bil, are Malayan Banking Bhd, MISC Bhd, RHB Bank Bhd, Axiata Group Bhd, Inari Amertron Bhd, Hong Leong Bank Bhd, Kuala Lumpur Kepong Bhd, Genting Malaysia Bhd, Genting Bhd and Petronas Chemicals Group Bhd.

As for its top-buy small and medium cap stocks, with a market cap of less than RM10bil, it includes N2N CONNECT BHD, IJM Plantations Bhd, Mah Sing, Leong Hup International Bhd, Alliance Bank Malaysia Bhd, LPI Capital Bhd, Unisem (M) Bhd, Serba Dinamik Holdings Bhd, IOI Properties Group Bhd and Aeon Co (M) Bhd.


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