It’s time to look into mid and small-cap stocks

Valuations of some of these counters have moderated

PETALING JAYA: It is timely for investors to look into mid and small-cap stocks as the valuations of some of these counters have moderated, according to MIDF Research.

In its report, the brokerage said while the FBM Small Cap Index has underperformed the FBM KLCI in the last eight months, over the long-term horizon, the former has performed better than the main benchmark index.

“As we expand our horizon into the past five years, we can see that the FBM Small Cap Index has outperformed the FBM KLCI most of the time,” MIDF said.

“One of the alluring points of mid and small-cap stocks is their ability to generate high growth in earnings, especially for those that come from a small base,” it added.

The brokerage noted that since late January this year, the FBM KLCI has been outperforming the FBM Small Cap Index.

To put things into perspective, it said the FBM KLCI had been trading at a last-12month (LTM) price-to-earnings (P/E) of 19.3 times, which is higher than its five-year average of 17.4 times.

Meanwhile, the FBM Small Cap Index has been trading at an LTM P/E of 18.6 times, which is lower than its five-year average of 27.6 times.

Among the mid and small-cap stocks, MIDF identified eight companies – Spritzer Bhd, Fima Corp Bhd, Scicom (MSC) Bhd, KKB Engineering Bhd, Wegmans Holdings Bhd, Perak Transit Bhd, Samchem Holdings Bhd and Matrix Concepts Holdings Bhd – as having displayed resilience in their profitability, balance sheet or growth potential.

“Many of them are market leaders in their respective segments and showed strong operating cashflow, which allow them to pay out dividends to their shareholders consistently,” MIDF said.

“While some companies have been listed for a shorter period of time, they have displayed their abilities to expand their capabilities and to penetrate into new markets no less than their more established counterparts,” it added.

For Spritzer, the brokerage said the company is the largest and most integrated bottled water producer in Malaysia, commanding more than 40% of the domestic market share.

The company, it added, is expected to increase production by 15%-20% by 2020.

MIDF has a “neutral” rating on Spritzer, with a target price of RM2.27.

As for Fima, it noted that the company, which is involved in plantation and security documents manufacturing, has a diversified earnings stream and offered good dividend yield.

Fima is rated “neutral” with a target price of RM1.90.

MIDF has a “buy” recommendation Scicom, with a target price of RM2.29.

The brokerage cited healthy replenishment of jobs and recovery in its existing business segments as drivers of Scicom’s earnings in financial year ending June 30, 2019.

MIDF also recommends “buy” on KKB with a target price of RM1.13, citing attractive valuation. It noted that the steel fabricator’s earnings outlook would be supported by healthy orderbook.

As for Wegmans, MIDF said the furniture maker is a beneficiary of strong US dollar and has decent profit margin and earnings growth potential.

For Perak Transit, MIDF forecast a threeyear compounded annual growth rate of 23% in terms of earnings for the intergrated transportation terminal and a 25% dividend payout as favourable points.

Samchem, on the other hand, is expanding regionally and has a robust network to support growth.

The chemical distributor’s sales is approaching the RM1bil level while profit expanded around 50%, MIDF said.

As for Matrix, MIDF said the property developer is expected to see improved new sales this year and higher earnings growth.

Wegmans, Perak Transit, Samchem and Matrix are non-rated stocks in MIDF’s universe of analysis. on