10 Malaysian stocks for the new decade
How does one go about picking the best stocks to buy for the next decade?
Ten years is a long time by most measures, more so in the ever- changing world of business. Multibillion- ringgit companies can be made in a decade. They can also go bust within a decade.
What makes an extremely difficult task near impossible is the fact that we are living in a period of rapid technological advancements. Entire industries are being disrupted, goods and services — and jobs — made obsolete, so much so that even the most successful companies today could be faced with their own “Kodak moment” tomorrow.
Can the past offer any guidance? In Table 1, we highlight 15 stocks that did remarkably well for shareholders in the last decade — their market capitalisation growing more than tenfold and above the billion-ringgit threshold.
The list underscores the difficulty in picking the stocks that will perform equally well in the new decade. Why? Almost all of the highlighted companies were virtual unknowns back in 2010 — their market capitalisation ranging from a paltry RM19 million to RM438 million, with an average of only RM160 million.
Inari Amertron was only listed in mid2011 and the big earnings growth for companies such as Kerjaya Prospek Group, Guan Chong ( GCB), Yinson Holdings, Pentamaster Corp, Press Metal Aluminium Holdings, Vitrox Corp, Scientex, V.S. Industry and Frontken Corp did not happen until 2014 to 2016.
Oftentimes, companies succeed by offering the right services and products at the right time and place. This may be attributed to management foresight, but also equally to luck. And at other times, success is due to external events such as fortuitous commodity cycles that are, in fact, beyond a company’s control.
Is this then a futile exercise? Not necessarily. There are common ingredients for success.
The most critical is management strength and adaptability, the ability to not only innovate but also grasp and respond effectively to the changing environment and competition. History is filled with such stories of success and failure.
Lest we forget, Kodak invented the world’s first digital camera. But its management was too slow to realise and react to the shift in consumer preferences. It focused on the wrong business (film) and ultimately squandered its once formidable advantage.
Household names such as Sears — the US department store giant that was founded way back in 1893 — and Toys“R”Us went bankrupt after they too failed to respond to changing consumer shopping behaviour, while others like Walmart and Target did and thrived.
While historical track record is no guarantee of the future, it still provides valuable insights into management experience, especially in navigating difficult times. Equally important is management integrity and corporate governance.
A sound business model and balance sheet strength are also very important. Bear in mind that being first in the market does not equal to having a sound business model and nor does it guarantee an enduring economic moat.
Having a strong balance sheet is especially crucial for companies to ride out the next recession or rise in inflation and interest rates, all of which will probably transpire sometime within the next 10 years.
All the above-mentioned factors need to be carefully analysed in selecting the
companies that will not only survive but also thrive in the long run.
In short, although the best-performing stocks in the last decade were largely unknown small-cap companies back in 2010, it does not mean that large- cap stocks cannot perform. Indeed, in Table 2, we highlight 10 big- cap stocks (with market capitalisation of above RM1 billion as at January 2010) that outperformed the broader market in the past 10 years.
With all of this in mind, we have selected 10 stocks that we think will perform well in the new decade, from 2020 to 2029 (see Table 3). Most are larger- cap stocks. As we have articulated, it would be near impossible to pick a small- cap winner today.
One could even argue that our selection is boring. Well, boring companies can deliver too, as history has proved. And crucially, rather than attempting the impossible in finding stocks that will be multibaggers, we have focused on companies with proven track records, experienced management, good governance and strong balance sheets.
After all, the first lesson in investing is not how to make the highest returns (which will usually come with the highest risks) but how not to lose money. In this respect, we are confident that these 10 companies will not only be able to survive the next recession but also come out ahead with positive returns in the long run.
We have largely stayed away from the oil and gas, financial and plantation sectors.
Crude oil prices fluctuated wildly over the past decade, averaging above US$ 100 per barrel in the first five years (2010-2014) before collapsing to an average of less than US$60 per barrel between 2015 and 2019.
Given current climate concerns and traction in the green movement as well as rapid reduction in costs for solar and wind power generation and expected progress in battery storage and electric vehicles, we suspect oil prices are unlikely to see previous highs. The world may even hit peak demand for oil sooner than originally thought, perhaps as early as the mid-2020s.
Our sole choice for the sector, Dialog
Group, is comparatively buffered against the vagaries of oil prices. The bulk of its earnings comes from steady income from leasing tank storage and providing maintenance activities.
Meanwhile, the backlash against crude palm oil (CPO) for the commodity’s alleged environmental impact clouds the longerterm outlook for the plantation sector. The European Union intends to ban the use of palm oil in biofuels by 2030 and there have been numerous negative campaigns against its use in food products. Some foreign funds have also been selling out of plantation stocks due to ESG (environment, social and governance) investment criteria.
The 2020s will, without a doubt, be driven by technology. It will be a decade of massive transformation. We will witness significant progress in AI, robotics, electric and autonomous vehicles and with 5G, the full potential of the Internet of Things (IoT).
The technology sector, as a whole, will be the biggest winner. The problem is in picking out the individual companies. It is currently a very crowded field in a rapidly evolving landscape. The attrition rate will be high, even among high-profile tech companies, before the decade is over.
At this point, there is limited visibility of the eventual winners. Thus, our technology sector selections are fairly conservative with
Willowglen MSC and JHM Consolidation, as well as the slightly riskier choice of Inari.
One of the sectors that will be most affected by digitalisation and technology is financial services. So far, banks have managed to stave off the initial challenge from fintech by folding online-mobile banking and instant payments into their infrastructure.
But how well will these legacy institutions respond and reinvent themselves against the next wave of change from disintermediation, pure digital banks, e-wallet and payment apps, commission-free stock trading apps, instant and near- zero cost cross-border transfers using digital money, blockchain and cryptocurrencies? Can they withstand the imminent challenge from Big Tech that makes the most of AI, big data, advanced analytics and customisation to provide superior customer experience?
Consumer and healthcare sectors, on the other hand, are comparatively low risk. Domestic consumption will see steady increases on the back of population and per capita income growth. Demand for healthcare (and pharmaceutical products) will rise as the population ages and with increasing health awareness.
Hence, companies such as Nestlé (M), QL Resources, Duopharma Biotech and Hartalega Holdings should fare well. Yes, all these stocks are currently trading at premium valuations to the broader market, precisely for all the aforesaid reasons. But we believe that 10 years is more than enough time for these companies to grow into their valuations.
The construction sector is cyclical and currently facing excess capacity that could take some time to fully use up. That said, we should see more projects, including infrastructure, going forward after the sharp contraction in the last two years.
Muhibbah Engineering (M) is a well-regarded contractor that has competitively won and completed numerous jobs overseas. It can also count on recurring earnings from its Cambodian airport concessions, which have further growth prospects.
Closing out our top 10 stocks for 2020 to 2029 is SAM Engineering & Equipment
(M) for its exposure to the aerospace sector. We believe that with continued advances in digitalisation and technology, automation and robotics, there will be less and less need for human work hours. This will leave more time for leisure and travel. Long-term demand for air travel — and therefore, aircraft — is positive, further supported by the rising income in the developing world.
Note: These reports are prepared without regard to your specific investment objectives, financial situation or particular needs. The information herein is obtained from various sources and we do not guarantee its accuracy or completeness. All views and advice are given in good faith but without legal responsibility. You should not regard the reports as a substitute for the exercise of your own judgement and you should seek professional advice for your specific investment needs. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article features reports brought to you by Asia Analytica, an investment adviser licensed by the Securities Commission of Malaysia. All financial data are provided by AbsolutelyStocks.