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This article first appeared in The Edge Malaysia Weekly on February 4, 2019 - February 10, 2019

THIS year is expected to be another volatile one for the stock market with most analysts advising investors to adopt a defensive strategy. Global headwinds seen late last year are expected to build up and risks to global economic growth are only just beginning to bite amidst tighter monetary conditions and ongoing trade talks between the US and China.

The concerns were also amplified by the International Monetary Fund’s (IMF) recent downgrade of global economic growth to 3.5% for this year — its weakest pace in three years — from 3.7% last October. The downgrade was attributed to rising trade tensions, tight financial conditions, the UK’s imminent withdrawal from the European Union and an economic slowdown in China.

Apart from external uncertainties, local investors also have to contend with a new government in Malaysia. An analyst with a foreign research house tells The Edge that there is too much noise coming from the Mahathir administration and most view Pakatan Harapan as a caretaker government.

“Technically, if you look at Malaysia today, we have Mahathir (Tun Dr Mahathir Mohamad) as the prime minister but he’s likely to retire by the end of this year maybe. The question remains as to whether Anwar (Datuk Seri Anwar Ibrahim) will take over from him. And if he does, will there be a change in the Cabinet? Is it going to be the same finance minister and economic minister? What about the home minister? Will there be a change in direction after that? This is made worse when ministers make contradictory statements.

“So, while this interim period provides some stability, it also creates more uncertainties for the market,” he says, adding that while local fund houses have no choice but to look at the Malaysian stock market, most foreign houses will focus on other emerging markets that are also attractively priced following the sharp correction seen last year.

The analyst’s comments reflect some of the views of the foreign houses. For example, Nomura Global Markets Research downgraded the Malaysian equity market to “underweight” at the beginning of this year, citing poor earnings growth prospects and higher valuation as well as a lack of major expansionary reforms so far.

The government, on its part, launched the National Anti-Corruption Plan (NACP) and National Housing Policy (DRN) last month, which received a positive response.

“The launch of the NACP and DRN at the start of the year reinforces the government’s commitment to reform and to address economic issues. More reforms, policies and plans are in the pipeline. However, execution and garnering a two-thirds majority in parliament to pass all the new Acts and policy amendments remain a hurdle,” UOB Malaysia’s economist Julia Goh says in a Jan 30 report.

Amidst these changes, a fund manager points out that most investors are staying on the sidelines as they wait for greater clarity on reforms and policies. This explains why Malaysia is ranked the second lowest in terms of fund inflows among the four Asean markets monitored by MIDF Research. Malaysia’s benchmark index FBM KLCI is among the worst-performing indices in the region, falling 0.42% in the first month of the year.

The optimists, however, will point to recent comments by US Federal Reserve chairman Jerome Powell that the US central bank is likely to stop trimming its US$4.1 trillion balance sheet soon as well as a call for patience on further rate hikes as an indication that the monetary tightening cycle in the US that started in 2015 may come to an end.

With the US and China restarting a new round of high-level trade talks last week aimed at bridging differences over China’s intellectual property and technology transfer policies, a trade deal would help calm a nervous market.

But for investors with an above-average risk profile, there are money-making opportunities following last year’s decline in share prices.

As Warren Buffett once said, it is wise for investors to be “fearful when others are greedy and greedy when others are fearful”.

For investors who are willing to take the risk amid the volatility and uncertainty, here are eight dark horses that could surprise on the upside this year, based on analysts’ calls.

 

A comeback year for Gamuda?

One of the biggest disappointments last year was the construction sector following the historic change in government. One of the first moves of the Pakatan Harapan coalition, which came into power after the general election on May 9, was to review some of the megaprojects that had been awarded by the previous administration.

These included the light rail transit Line 3 (LRT3), the mass rapid transit Line 2 (MRT2), Kuala Lumpur-Singapore high-speed rail (HSR) and East Coast Rail Link (ECRL). These projects have been downsized, deferred or terminated.

Gamuda was one of the biggest losers in the construction sector following the developments. The group’s share price fell 43.7% compared to a year ago but saw a recovery in January, gaining 21% year to date to close at RM2.76 last Thursday. The sharp decline captured the interest of investors and analysts, who viewed the selldown as overdone.

Bloomberg data shows 13 out of 21 analysts calling a “buy” on Gamuda, with five recommending a “hold”, and the other three, a “sell”. The average consensus target price was RM2.93, indicating a potential return of 6.2%.

Affin Hwang IB’s equity analyst Leong Chee Wei is among those who upgraded his recommendation to a “buy” following the sharp drop in the share price. In a report at the end of last year, Leong says the current core price-earnings ratio (PER) of 9 times its expected earnings for FY2019 and price-to-book (PB) ratio of 0.7 times are historically low levels while its net yield of 5.3% is attractive.

At the current level, Gamuda is trading at a PER of 14 times and PB of 0.87 times.

However, lower new contract procurement and a prolonged property downturn are key risks for the group, Leong says.

 

The odds of winning still favour Genting

Genting Bhd saw a sharp decline in its share price over the last one year, falling 26.1% to close at RM6.94 last Thursday after being dealt a few bad hands late last year.

Weighing on the group was a gaming tax hike announced in Budget 2019, the uncompleted 20th Century Fox World theme park project, and its first quarterly net loss in 10 years due to a RM1.83 billion impairment loss on subsidiary Genting Malaysia Bhd’s investment in promissory notes issued by the Mashpee Wampanoag Tribe.

The string of negative developments sparked a selldown but it is worth noting that Genting has seen a recovery after hitting a one-year low of RM5.93 on Jan 4. Year to date, it has gained 13.8%. Most analysts believe the odds of winning still favour the house, as seen by the “buy” calls from 13 out of 16 analysts. Three others have a “hold” on the casino operator. The average target price (TP) for Genting is RM8.52, indicating a potential return of 22.8%.

Maybank IB Research is one of the more bullish research houses with a TP of RM9.50 on Genting, which is one of its top picks for the year. The research house’s analyst Samuel Yin Shao says in his strategy report that Genting is the sole “buy” call for the gaming sector.

“Despite Genting Malaysia’s recent woes, the very profitable licensing and management fees Genting charges Genting Malaysia is based on Resorts World Genting revenue and Ebitda (earnings before interest, tax, depreciation and amortisation), which is less volatile. Coupled with stable earnings from Genting Singapore, we still forecast three-year forward Genting’s earnings CAGR (compound annual growth rate) of 8%,” Yin says, adding that another positive development would be if Genting Singapore wins a Japanese casino licence in 2020.

 

Inari a potential beneficiary of 5G deployment

Inari Amertron, which provides semiconductor packaging services, is one of the technology companies that has been impacted by the slowdown in smartphone sales as well as the ongoing US-China trade war. Its share price fell 29.5% from a year ago to close at RM1.50 last Thursday.

Many believe the sharp decline in Inari’s share price over the last one year presents a buying opportunity for investors who wish to ride the deployment of 5G services in the longer term.

Of 18 analysts, 12 have a “buy” call on Inari while only one has recommended investors to sell. The other five have advised investors to hold onto the semiconductor player. Analysts’ consensus 12-month target price for the semiconductor company is RM1.87, indicating a potential return of 24.7%.

A fund manager with a local asset management believes the outlook for Inari hinges on trade talks between the US and China, and that a positive outcome would be beneficial for the company.

Ivan Yap, an analyst with Maybank Investment Bank research, says in his strategy report at the end of last year that Inari is the firm’s technology sector top buy.

“Looking beyond a temporary weakness in its RF (radio frequency) division, we remain positive on Inari’s floor space expansion to 1.68 million sq ft by mid-2019, partly driven by three components wins (VSCEL, mini LEDs and health sensor for OSRAM). The recent win from OSRAM will also diversify Inari’s earnings base,” Yap says, adding that valuation for Inari at 19 times price-earnings ratio (PER) for CY2019 is still undemanding for a growth stock.

In fact, investor interest has been on the rise as seen by the increase in its trading volume. In January alone, the daily trading volume for Inari averaged 19.4 million, which is about 55% higher than its one-year average volume of 12.5 million.

 

Media Prima counting on digital strategy

It is almost unthinkable to see Media Prima as a potential outperformer, given the downward trend in its share price over the last five years. Furthermore, it has remained in the red over the last two financial years.

But with its share price falling 43.4% over the past year to close at 38.5 sen last Thursday, value is emerging for investors. At this level, the media company is trading at 0.79 times its book value. In comparison, it was trading at about 1.7 times during the global financial crisis in 2008/09. It is worth noting that a turnaround could be emerging as the company saw a gain of 11.6% in January alone.

This comes at a time when Media Prima surpassed global tech and social media giants Google and Facebook to become the most popular choice for mobile content among Malaysians, based on data from Comscore Mobile Metrix, a US-based media measurement and analytics company.

For perspective, the digital media segment’s revenue grew 80.4% to RM64.1 million in the first nine months of its financial year ended Dec 31, 2018 (9MFY2018) compared with the previous corresponding period while its segment profit jumped by more than five times to RM7.96 million in the same period. Of course, the digital media segment’s growth alone is not enough to offset the decline in Media Prima’s traditional business but recent cost-cutting measures may put the company back on track.

“I don’t think Media Prima can turn profitable so soon as there may be another one-off restructuring expense for the mutual separation scheme of about RM50 million. But I do think if it can narrow its losses, value will emerge for the company,” says an analyst with a local research house.

 

Political risks mask MyEG’s potential

MyEG Services was adversely affected by the change in government, losing more than 50% of its market value after the 14th general election (GE14). Its share price had declined 61.2% to last Thursday’s close of RM1 from May 8. On May 14, the first trading day post-GE14, MyEG tumbled 29.8% to close at RM1.81.

Following the recent selldown, Bloomberg data shows all six analysts covering MyEG having a “buy” call on the e-government services provider with an average 12-month target price (TP) of RM1.91, indicating a potential return of 91%.

Vincent Khoo, head of equity research at UOB Kay Hian Research, says in his January report on MyEG that the weakness in its share price is a trading opportunity as the finalisation of the foreign worker management process is seen as a potential near-term catalyst for the company.

While political risks remain over concerns about whether the government will renew its concession when it is up for renewal in May 2020, it is worth noting that MyEG has maintained a strong track record in the foreign worker-related domain and still holds the first-mover advantage. MyEG also has a strong balance sheet to support its ongoing expansion overseas as its net debt-to-equity ratio stood at 0.03 times. While most analysts believe its expansion will take some time to bear fruit, it is a catalyst for the group in the longer term.

“The risk is that the government will not renew its concession or new competition will eat into its market share. 

But given the sharp decline seen compared to a year ago, it is worth having some position to gain from the upside potential,” a fund manager with a local house tells The Edge.

 

FGV — a story of redemption

FGV Holdings Bhd may have seen its worst back in December last year when its share price fell to its all-time low of 63.5 sen on Dec 14. Year to date, the stock has seen an impressive 39.9% return to close at RM1 last Thursday. At this level, FGV is trading at 0.77 times its book value.

While it is too early to call it FGV’s story of redemption, Economic Affairs Minister Datuk Seri Mohamed Azmin Ali raised an important point in parliament last November when he said a major overhaul is required for the agribusiness group as its performance has a direct impact on the Federal Land Development Authority and its settlers.

Indeed, from a political point of view, it is important that Pakatan Harapan ensures that FGV recovers in the coming years. Just as how the Ministry of Finance (MoF) has set up special purpose vehicle Urusharta Jamaah Sdn Bhd to buy over the underperforming equities acquired by Lembaga Tabung Haji, the PH government is likely to help in FGV’s recovery, following the alleged mismanagement by the previous management.

Last month, FGV appointed Datuk Haris Fadzilah Hassan as the group CEO, relieving Datuk Wira Azhar Abdul Hamid of his role as an interim CEO. Azhar, however, will maintain his role as chairman of FGV. There are also the appointments of Datuk Mohd Hairul Abdul Hamid as group chief financial officer, Mazri Abdul Rahim as chief human resources officer and Dr Christina Ooi Su Siang as chief procurement officer.

With fresh faces in the top management, the loss-making plantation group is looking for a recovery as Azhar claimed that the worst of the impairments was over when FGV announced its financial results for the third quarter ended Sept 30, 2018 (3QFY2018). Perhaps its financials for 4QFY2018, to be released this month, will offer more clues to its recovery.

 

Sapura Energy’s RM19.4 bil order book

The dark horse that was not to be in 2018 is looking to shrug off the overhang of its undersubscribed rights portion this year. The oil and gas support service provider’s share price continues to remain under pressure this year as investors view the underwritten shares in the undersubscribed rights portion as a cap on its upside potential.

Compared with a year ago, Sapura Energy’s share price has fallen 64.9%, closing at 26.5 sen last Thursday. However, now that the rights issue has been completed — raising RM4 billion to pare down borrowings — the company’s net gearing ratio is expected to drop significantly to 0.62 times from 1.74 times.

Bloomberg data shows that 12 analysts have “buy” calls on Sapura Energy while six have recommended a “hold”. Analysts’ average target price for the counter is 46 sen, which indicates a potential return of 69.8%. PublicInvest Research analyst Nurzulaikha Azali says in a report that the group has managed to secure RM9.3 billion worth of contracts in the financial year ended Jan 31, 2019 (FY2019), pushing its balance order book in hand to RM19.4 billion and surpassing the year-end balance order books in FY2017 and FY2018.

It is also worth noting that Sapura Energy was selected as one of Saudi Aramco’s four new long-term agreement programme contractors late last year. Another thing that investors could take comfort in is the fact that Permodalan Nasional Bhd is now the single largest shareholder of Sapura Energy with about 40% equity interest and has reiterated that the oil and gas counter is one of its core holdings.

With a stronger balance sheet and massive order book, the group could benefit from the recovery in the oil and gas industry.

 

When Tri-Mode’s neighbour is IKEA

The integrated logistics service provider closed at 40 sen last Friday, down 32.5% from its initial public offering price of 61 sen in May last year. It probably has not been shown much love by the market since its listing because of the overall weak sentiment in the equity market and diminished interest in logistics players, which are facing margin pressure amid growing competition. This is despite the country’s robust e-commerce growth expectations.

Nonetheless, Rakuten Trade Sdn Bhd vice-president of research Vincent Lau believes the decline in Tri-Mode System (M) Bhd’s share price presents investors with an opportunity to buy into a logistics company with a warehouse and distribution hub next to IKEA’s regional distribution and supply chain hub in the Pulau Indah Industrial Park. IKEA is the world’s largest furniture retailer.

“Tri-Mode’s growth catalyst is its new warehouse and distribution hub, which is in the vicinity of IKEA’s regional distribution and supply chain hub — its third largest distribution centre in the world with a RM908 million investment,” Lau tells The Edge.

The ACE Market-listed group’s new warehouse and distribution hub occupies 12 acres in the industrial park and will help consolidate its business operations and develop new warehouse infrastructure of more than 91,000 sq ft.

Lau also notes that Tri-Mode’s recently launched e-commerce logistics platform to cater for inbound courier services — HiClicks Malaysia — could grab a slice of the e-commerce business without major investment.

“The group is also in a net cash position and has indicated a dividend policy of 30%, which translates into a yield of 3.8%,” he says.

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