Bad year for big caps

Market risks: A visitor at a private stock market gallery in Kuala Lumpur. Blue chips and big cap stocks in Malaysia have never been riskier not just because of the change in government and sentiment, but mainly because most were trading at very rich valuations. — AP

Market risks: A visitor at a private stock market gallery in Kuala Lumpur. Blue chips and big cap stocks in Malaysia have never been riskier not just because of the change in government and sentiment, but mainly because most were trading at very rich valuations. — AP

THIS has been the year big caps and blue chips performed badly.

If you made a bet on a big cap this year, chances are you would have lost money. A flat return would have been an outperformance.

For those who felt that blue chips were the safe haven, a confluence of reasons such as the change in the political landscape, more competition coming in and a global shift in trends have caused many of the big caps to record significant drops.

The close of the recent third quarter earnings season by Corporate Malaysia also surprised many brokers and many are now pricing in a slower earnings growth momentum moving forward.

Corporate earnings for the third quarter fell 5.9% year-on-year, due to weaker performances from the agribusiness, construction, oil and gas, and gaming sectors.

This was the year stocks like Telekom Malaysia Bhd (TM), Axiata Group Bhd , Astro Malaysia Holdings Bhd, Genting Malaysia Bhd , Bumi Armada Bhd and many others were humbled.

You see, sentiment matters, as stocks trade between the gap of potential and reality.

Rakuten Trade vice president of research Vincent Lau at the second half 2018 market outlook briefing.
Vincent Lau

When sentiment is bad, such as when there’s an ongoing global trade war, the new Malaysian government cleaning up excesses, and bad third quarter results to contend with, there is a far higher chance that stocks with high price earnings ratios (PERs) will go down even if the earnings outlook remains intact.

Blue chips and big cap stocks in Malaysia have never been riskier, not just because of the change in government and sentiment, but mainly because most of them were trading at very rich valuations to begin with. Many big caps which have been heavily sold down are now trading at way more palatable valuations.

IHH Healthcare Bhd is still trading at a PER of 50 times. Who’s to say it won’t fall further if the market sentiment does not pick up,” remarks one fund manager.

“People have the misconception that investing in blue chips are safer in a bad market. Sure, it is easier to sell out of big caps because they have more liquidity. Nonetheless, upside is definitely lower. Fund managers or investors who buy big caps want something more stable and safe – so they are happy with a stable return of some 7% to 8%. However, because big caps are already big and established, and more often than not overvalued, its growth potential is limited,” says an investment banker.

“So this return of 7% to 8% is only good when the market is good. In a bad year when the sentiment is down or the business experiences a contraction, the stock can fall by some 20%,” he says.

One fund manager laments that his portfolio is down because of the big blues.

“At least Maybank is holding steady (up 7.9% on a year-to-date or YTD basis) and Lotte Chemical Titan Bhd is flat (up 1.5% YTD). Just not losing money is a good thing this year,” he says.

Rakuten Trade Sdn Bhd vice-president of research Vincent Lau says there are enough small and mid caps out there with good growth potential and offer far superior capital gains compared to the big caps.

“While it is true that small and mid caps tend to have less visibility partially because they are not well covered by both the investment community and the media, this can present an opportunity because there is probably a divide between the stock price and its fundamentals. This offers the investor to buy the stock at a discount,” says Lau.

He acknowledges that small caps can be illiquid, meaning it will be hard to get out once an investor takes a position.

However, as more analysts give coverage to the stock, and if the company really delivers on its revenues and numbers, demand for the stock can really rise.

Big caps not so blue

Many heavyweights of the FBM KLCI have had a trying 2018.

TM for instance has seen its market capitalisation slashed by half over the past six months. Some analysts opine that its name could be excluded as a constituent stock of the FBM KLCI by the end of this year.

TM has been experiencing lower earnings and faces increasing regulatory and competitive pressures. It has also revised its dividend policy down to 40% to 60% from its previous 90% of profit after tax and minority interest.

MIDF Research points out that operating expenses have also been on the rise, with cost as a percentage of revenue increasing steadily to around 90%.

“Due to the earnings pressure and the group’s capex commitment for long-term growth, we expect dividend payment to decline as well. All factors considered, we are reiterating our Sell recommendation on the stock,” said MIDF Research in its note dated Nov 27.

Meanwhile, if an investor bought CIMB Group Holdings Bhd , it’s been a roller coaster ride, although this is mainly triggered by the change in the political tide.

On a 52-week basis, the share price has traded between RM5.21 to RM7.39.

However on a year-to-date basis, the share price is pretty much ending where it began with, and is down some 0.17% at its price of RM5.79.

Apolitical stocks were also not spared this year.

Once-upon-a-time oil and gas darling Bumi Armada Bhd is trading at a pitiful 15.5 sen now, a far cry from the RM2 level it used to trade at some five years ago.

It supposedly has an international market and an order book of RM21bil to last it for years.

“Fund managers always viewed Bumi Armada as a stable stock and bought it on the pretext of its long term FPSO contracts, and geographically well diversified businesses.

A leaked internal memo from Bumi Armada’s management cost the share price to slide some 40% in a matter of days.

Last month, Bumi Armada’s chief executive officer had issued an internal memo to employees stating that the company had not made substantial progress with the restructuring of its debts and, as such, resulted in the company being forced to reduce its cash outflow and limit efforts to pursue new jobs. The group has some US$500mil in debt.

This was not helped by its poor third quarter earnings. On Nov 23, it announced that it had posted net losses of RM502.82mil in the third quarter due to non-cash impairments totalling RM563.5mil.

If not for the impairment, Bumi Armada would have made a net profit of RM75.2mil.

Still, sentiment does not care about that, and the stock continued to purge. Today, its market cap is below the RM1bil mark.

Another blue chip which suffered because of a Black Swan event was Genting Malaysia.

Two weeks ago, Genting Malaysia faced one of its most challenging moments in its gaming lifespan. It was announced that Walt Disney and 21st Century Fox had abandoned the contract to build the first Fox-branded theme park on the grounds of default.

It poured cold water on the grand announcement made in July 2013, when Resorts World Genting (RWG) positioned itself as developing the world’s first international 20th Century Fox theme park.

It was a double whammy for Genting Malaysia, who barely a month ago was already handed out punitive measures during the tabling of the Pakatan Harapan government’s first budget.

Come Jan 1, 2019, casino duties will be revised up to 35%, which represents a 10 percentage point increase over existing duty rates. This will take effect from Jan 1, 2019.

“In the case of Genting Malaysia. I don’t think funds really made money holding the stock over the last five years. If you held it this year, you are definitely down close to 50%,” says the investment banker.

Astro Holdings Bhd, another big cap favourite has also been down almost 50% this year amid a challenging environment as well as poor earnings.

For those who say it is safe to hold on to the glove makers, their PERs are all high. The stalwarts Hartalega Bhd and Top Glove Corp Bhd are trading at PERs of 44.34 times and 34.59 times respectively.

No doubt these are well managed companies which have been consistently delivering growth over the last decade. Thus, despite the volatile year, Hartalega and Top Glove’s share price are up 38.21% and 85.46% respectively.

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