Proof is in the execution

AS industry leaders become in- creasingly encouraged to invest more in capital expenditure to expand their businesses, equity researchers believe this should go hand in hand with increased visibility into their strategies and long-term plans, in line with the MY Value Up initiative.

In addition, several external factors, such as the ongoing Iran conflict, coupled with the possibility that Malaysia could hold the 16th General Election (GE16) within the next 18 months, will also play a significant role in whether fund managers and investors adjust their strategies.

For Areca Capital chief executive Danny Wong, MY Value Up has not exactly moved the needle in terms of how he invests. Wong says he has always looked beyond quarterly earnings.

Nevertheless, he acknowledges that MY Value Up will play a major role in getting companies to communicate more clearly about where they want to be over the next three to five years, how they plan to get there, and how they will measure success.

“As investors, we appreciate companies that are transparent about their capital allocation plans, whether that is investing for growth, improving returns, or returning cash to shareholders,” he tells StarBiz 7.

Wong stresses that greater transparency will boost investor confidence when management teams can back up their strategies with clear targets and consistently deliver on them.

“At the end of the day, execution still matters more than the presentation.

“The market will reward companies that can do what they say they will do,” he emphasises.

Early days

On the other hand, Wong says it is still too early to judge whether the market has experienced a meaningful re-rating purely because of MY Value Up, although he observes that companies are becoming more proactive in engaging with investors and explaining their long-term strategies.

While that has definitely been a positive development, he points out that investors, especially foreign funds, generally prefer to see tangible results rather than just plans.

“If management consistently delivers on the targets they have set, then over time we should see that reflected in better valuations, stronger liquidity and increased institutional interest.

“However, I believe we are still in the early stages, and the market will need a few reporting cycles before making that judgement,” says Wong.

Tradeview Capital portfolio manager Ng Tzyy Loon concurs with Wong that it is still too early to detect any material influence from MY Value Up on market strategy, telling StarBiz 7 that nothing has changed so far among companies that could be included in the initiative.

“We are still in the infancy stage to see any meaningful changes among corporates. In the meantime, the market has been overshadowed by the flip-flop situation surrounding the Middle East conflict, which remains unresolved, together with some market rattles in the artificial intelligence (AI) sector.

“Recent foreign inflows could be more like a mean reversion after a strong net outflow year-to-date,” says Ng.

Former investment banker and full-time investor Ian Yoong reckons that the MY Value Up programme has the noble objective of showcasing fundamentally attractive large-cap companies listed on Bursa Malaysia.

He says the most important factor in ensuring the programme’s success is for all 88 companies to actively engage with the media, sell-side and buy-side analysts, as well as institutional investors.

“We see many listed companies, especially small- and mid-cap ones, being more reluctant to meet people outside their respective industries,” he adds.

As MY Value Up has yet to generate any obvious changes in the investment approaches of institutional investors, Yoong observes that institutional and retail investors alike remain focused on specific investment themes.

“The current hot investment theme is AI. This has sparked interest in our semiconductor sector and data centre-related sectors,” he says.

Tackling the Malaysia discount

Looking ahead over the next 12 to 24 months, Areca Capital’s Wong says the one element of MY Value Up that he foresees would have the strongest impact in reducing the “Malaysian discount” would be better capital allocation, which he hopes will attract sustained institutional inflows into the country’s capital markets.

The “Malaysian discount” is an informal market term used by fund managers and analysts to describe the long-standing tendency for many Malaysian companies to trade at lower valuation multiples than their underlying fundamentals, comparable regional peers in Asean or other emerging markets, as well as the FBM KLCI’s own historical averages.

“Many Malaysian companies generate decent cash flow, but investors increasingly want to know how that cash is being used. Is it being invested into projects that generate attractive returns? Is management disciplined when making acquisitions? Are shareholders being rewarded appropriately when excess cash isn’t needed?” Wong asks.

That said, he notes good governance and better disclosure are equally important because they help build investor confidence.

Ultimately, investors are willing to pay higher valuations for companies that consistently generate strong returns on capital and allocate that capital wisely.

“If more Malaysian companies can demonstrate that discipline and build a track record of delivering on what they promise, I think that will go a long way towards narrowing the valuation gap and attracting more long-term institutional investors,” says Wong.

Meanwhile, Ng is less optimistic, noting that Malaysia’s generally lower valuations would take a very long time to remove or improve, in the eyes of foreign investors.

In addition, he says that with GE16 likely to take place within the next 18 months, policy stability and continuity will be more important drivers for investors in the near term.

On a separate note, Yoong hopes that the MY Value Up could induce more interest in “the many listed jewels” on Bursa Malaysia, although many of these counters are small- and mid-cap stocks that fall outside the programme’s ambit.

“A few have market capitalisations that are lower than the net cash on the balance sheets. There are listed property developers trading at a fraction of their book value,” he says.