DESPITE the FBM Small Cap Index’s good performance against the main index FBM KLCI, MIDF Research reckons that small and mid-cap stocks are poised to continue its growth trajectory in the near future in line with more active retail participation.
So far, the retail participation on Bursa Malaysia in terms of foreign average daily trade on a weekly basis value remains moderate, above the RM800mil, over 33% higher that levels seen last year.
MIDF says that from its recent visit to Bursa Malaysia, the bourse noted that more younger investors aged 25 years and below are participating in the market, as evident by the 36% year-on-year jump in the number of Central Depository System (CDS) account holders, to about 30,000 in 2016.
Moreover, Bursa’s recently launched Mid and Small-cap Research Scheme (MidS) has the potential to attract retail participants and in turn boost traction, both in terms of volume traded and value traded, for small and mid-cap stocks.
The research house has listed its top 10 picks for mid and small cap stocks.
Under the construction sector, its mid and small cap stock picks are MUHIBBAH ENGINEERING (M) BHD, Hock Seng Lee Bhd and Gabungan AQRS Bhd. Viewing the spread between 5-year Malaysian Government Securities (MGS) and earnings yield as barometer for earnings attractiveness, it said these three companies have a commendable spread while being the most persistent against the tide of market volatility.
Real Estate Investment Trusts (REITs)
AmanahRaya REIT is MIDF Research’s only mid and small cap stock under the REITs category.
The company’s asset portfolio exposure to education property and attractive dividend yield of 5.8% are factors. Apart from that, the entry Kenedix (a Japanese real estate asset management company) which should bode well for the asset management prospect for AmanahRaya REIT while also allowing the company to secure high quality tenants by tapping into the Kenedix network. All in, the declining MGS yield is positive to REITs as the spread between REITs and MGS yields widened, making REITs more appealing.
TA ANN HOLDINGS BHD is its top pick for the plantation sector. The reason being is that its plantation division earnings growth should remain strong due to high fresh fruit bunch volume expected at 10%, and the timber division is expected to remain profitable due to the support from high export log prices.
For Daibochi, the 20% profit growth in FY18 is expected to be driven by its exports to Indonesia and Myanmar which are high-growth markets that the group was previously absent from.
Besides that, it is believed that the cost pressure encountered last year should be easing as management resolves its labour resources issue.
Going forward, management will continue its operational efficiency enhancement efforts.
Meanwhile, on Superlon, MIDF says it continues to favour the company for its growth potential in volume with its new warehouse.
Apart from that, Superlon’s net cash position and strong operating cashflow can ensure that funding for the new plant will not have an issue, allowing room for some leverage.
Tasco Bhd is MIDF’s favourite under transportation sector.
Tasco’s purchase of cold chain logistics assets provides an impetus in FY18, evolving from having no cold chain assets to a market leader in the segment. Apart from that, a nascent recovery in international trade growth and an improving manufacturing sector would augur well for the company, in our view.
Another MIDF small-mid cap pick is Tiong Nam Logistics Holdings Bhd, for its market leading position in the integrated logistics industry.
Meanwhile, an initial public offering of its logistics assets into a REIT could provide immediate re-rating catalyst for the stock, giving rise to the potential of special dividends.
SPRITZER BHD is MIDF’s only pick under the consumer sector. The company has been charting smooth growth in the last five years. Its 2012 to 2016 net profit compound annual growth rate was 30%. MIDF expects Spritzer to continue its upward climb in FY18 as it consolidates its existing market share while it expands into new markets.
This year has seen an increase in market activities that saw the benchmark FBM KLCI almost breaching the 1800 mark.
So far this year has witnessed a significant net inflow of foreign funds of about RM10bil. Mid and small cap stocks, meanwhile, have outperformed the benchmark index, doubling the latter’s return at 17%.
Despite concerns over the future of the bull run, MIDF reckons there is still room for growth for the mid and small cap stocks, particularly selected ones with strong potential upside, due to the positive corporate developments, presence of strong strategic foreign shareholder and favourable commodity prices.