Chia: ‘Over 56 of the counters featured in the 2016 edition of the book recorded positive returns as well as outperforming the FBM KLCI by an average margin of 50."
KUALA LUMPUR: Smaller capitalised companies on Bursa Malaysia have had a solid run-up in the past one year, outperforming the blue chip index by a good margin.
RHB Research Institute Sdn Bhd Malaysia research director Alexander Chia thinks some of these stocks have further upside potential.
“When big caps became somewhat expensive, people will always look towards the small- to mid-caps to provide their alpha as you can expect these stocks to outperform by 25% or 30% (moving forward). The small- to mid-caps provide the alpha to investment managers’’ portfolio of stocks,” he said
The FBM Small Cap Index (FBM SCI) outperformed the FBM KLCI by 8.5% between April 2016 and April 2017.
These small-cap stocks, as measured by the FBM SCI and FBM Fledgling Index or FBM FI, have generated returns of 11.1% and 19.8%, respectively, compared to the 1.1% for the FBM KLCI over the same period.
April 2016 to April 2017 marks the period of time between the 2016 and 2017 publication of the RHB Top Malaysia Small Cap Companies 25 Jewels book.
Chia said at the launch of the 13th edition of the book here yesterday that smaller-cap companies have continued to provide superior returns since last year’s book.
“Over 56% of the counters featured in the 2016 edition of the book recorded positive returns as well as outperforming the FBM KLCI by an average margin of 50%.
“In addition to coming from a smaller base, we believe the strong outperformance of small-cap companies is a reflection of their managements’ strong entrepreneurial drive and spirit that encourages innovation and ingenuity,” he added.
The top-ranking stocks during this period were KESM Industries Bhd, which outperformed by 175%, Johore Tin Bhd at 111%, Elsoft Research Bhd at 93% and Yong Tai Bhd at 80%.
In the RHB Top Malaysia Small Cap Companies 25 Jewels 2017 book, which comprises companies with a market cap limit of RM1.8bil and below, 16 out of the 25 Jewels highlighted were not previously featured; making it the highest percentage of new stocks featured over the past couple of years.
The average price-earnings ratio of the 25 Jewels this year is 17.8 times, with an average return on equity of 16.9%.
“When big-cap names reach levels that are considered reasonably fully valued, that is when markets will gravitate towards the mid and small caps.
“Mid and small-cap stocks tend to be volatile by nature because of their smaller base which lacks liquidity.
“Hence, we find stocks that are not looked at in the first instance due to the lack of trading volume,” he said.
The largest-cap stock featured is AirAsia X Bhd at RM1.7bil, while the smallest is O&C Resources Bhd at RM125mil.
Other hidden gems unearthed include Chin Hin Group Bhd, O&C Resources Bhd and AWC Bhd.
Chia explained that the stocks chosen this year are mostly involved in cyclical sectors.
“Such companies will tend to have the biggest bounce on the back of inflection points in the earnings growth as well as gross domestic product growth.
“The two sectors that we think will bounce off the back of cyclical upturns are the technology and consumer sectors, of which five and six companies, respectively, are featured in this year’s book.
“As long as the global and domestic macroeconomics picture remains positive, with foreign capital coming in and the economy performing better, market participation should be able to continue for the foreseeable future,” he said.
The book makes up part of the larger RHB Asean Small Cap Compendium that anually lists stock investment ideas from the bank’s research houses in Malaysia, Indonesia, Singapore and Thailand.
The selection process includes company visits, management meetings and in-depth fact-checking, conducted by analysts from RHB Research Institute.