RHB’s Small-Cap Jewels outperform FBM KLCI

Pentamaster technicians working on test equipment to be used in the automotive and semiconductor industries. - Filepic

PETALING JAYA: RHB Research Institute’s 2019 Small-Cap Jewels have collectively outperformed the FBM KLCI and FBM Small Cap Index over the last five months, even as most of the small-cap stocks under the list have declined in share price.

The Small-Cap Jewels list, which featured 20 companies, has recorded a value-weighted holding-period return of 19.8% since its launch on May 2.In comparison, the benchmark FBM KLCI and FBM Small Cap Index declined by 4.6% and 0.9% in the same five-month period.

It is worth noting that only nine out of RHB Research’s 20 “small-cap jewels” posted an increase in share price since May 2, ranging between 3.7% to 72.7%.

Four of the nine winners were from the technology sector, while the rest came from construction, consumer, utilities and property.

Meanwhile, the remaining 11 counters under the list saw lower share prices, down by 2.1% to 25.3%.

The losers were mainly from industrial products, basic materials, consumer, real estate services and technology.

The top five gainers under the 2019 edition of Small-Cap Jewels yielded an average return of 41% in five months, namely Dufu Technology Corp Bhd (72.7%), Pentamaster Corp Bhd (61.8%), Frontken Corp Bhd (28.4%), Revenue Group Bhd (20.9%) and Ideal United Bintang International Bhd (18.8%).

On the contrary, the top five losers registered a negative return of 20.8%.

The top five losers are QES Group Bhd (-25.3%), Chemical Company of Malaysia Bhd (-24.1%), AWC Bhd (-23.5%), Dancomech Holdings Bhd (-15.7%) and Fitters Diversified Bhd (-15.2%).

The underperformances are attributed to several reasons such as lower-than-expected earnings, the slow business environment and delay in potential contracts and catalyst crystallisation.

According to RHB Research Institute analyst Lee Meng Horng, the laggard stocks under the 2019 Small-Cap Jewels list should be given a “re-look”.

“Given the need to trade and adopt a shorter-term investment horizon, we recommend that investors take some chips off the tables for our winners.

“For the laggards, especially those that present significant upsides, are worth another look as the temporary underperformance could just be due to delays in the catalysts being realised, rather than a fundamental or structural change that significantly undermines their investment merits, ” he said in a note yesterday.

Lee recommended investors to undertake a “bottom-up stock picking” approach in order to outperform in a low yield and slower growth environment.

“Despite the strong FBM Small Cap year-to-date performance – it is currently trading at 16.4 times forward price-to-earnings ratio, above two standard deviation over its five-year mean – we believe there are still more hidden jewels that could outperform the market, ” he added.

RHB Research Institute cautioned that the outlook for equities remain volatile, given the worsening macroeconomic outlook. The research house advocated short term and rotational plays, especially with the backdrop of subdued corporate earnings.

“Short of a surprise comprehensive US-China trade agreement, the local bourse is short of catalysts to lift investor sentiment. In fact, the FBM KLCI has been lagging the world indices year-to-date due to lacklustre earnings growth and unattractive valuations.

“The weak appeal was compounded by domestic political concerns. On the contrary, the small-mid cap space has done relatively well this year, ” stated Lee.

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