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After a tough 2018, value emerges
Stephanie Jacob 
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Markets had a tough 2018 as they were affected by a host of economic and geopolitical uncertainties. Concerns over a full-blown trade war between the world’s two largest economies, China and the US, and rising interest rates combined to make it difficult for the local, emerging and Asian markets.

Aside from geopolitical concerns, the big political change caused by the 14th General Election also resulted in significant periods of selldown on Bursa Malaysia.

Even US equities, which started 2018 strongly, ended on a sour note as a steep correction was seen in the last quarter of 2018, says iFAST Sdn Bhd research analyst Tan Wei Yine.

He suggests, however, that a tough 2018 might just give way to a brighter 2019 for investors. “While the waves of selloffs were hard to endure, these tides washed ashore many value gems, particularly in Asian and emerging market equities.

“We think market participants and investors have priced-in a lot of the negative elements. For value investors that are on the hunt, we think it could be a good time to start accumulating,” opines Tan to FocusM.

Interestingly, despite a tough 2018, the Top 40 stocks on our Focus List this year have a combined market capitalisation of RM24.1 bil. This is 22.4% more than the RM19.7 mil of 40 stocks from last year’s list.

 

Using a PB ratio

Like last year, our list presents 40 stocks which we believe are undervalued based on their price-to-book (PB) value and their return on equity (ROE). We only feature stocks with a PB ratio lower than one, a ROE higher than 10% and which were profitable in the last financial year.

A low PB ratio can be a good first measure of potential promising stocks which are undervalued and might prove to be bargain buys.

However, a PB ratio itself does not necessarily tell the whole story and investors should always look at a stock holistically and evaluate it against a range of metrics before making any decision.

OpenSys (M) Bhd is the most undervalued stock on our list with a PB ratio of 0.16. Its book value per share stands at RM1.82 versus 30 sen at its close on Jan 11 (our cut-off date for this artcle).

The tech player recorded a ROE of 18.9% for the third quarter of its financial year 2018 (3QFY18). Its earnings per share (EPS) came in at 0.7 sen for the same period.

The company provides technology solutions for project management, software engineering and system integration to the financial services, telecommunications and utilities industries.

For 3QFY18, its revenue rose to RM17.1 mil from RM15.3 mil in the previous corresponding period. This led to a stronger net profit of RM2.1 mil versus RM1.5 mil.

Management attributes the improvement to stronger revenue derived from the rollout of its cash recycling machine product and higher maintenance revenue collected.

Seal Incorporated Bhd takes second spot with a PB ratio of 0.28. Its book value per share stands at RM1.18 versus its Jan 11 closing price of 33 sen. The developer offered investors a ROE of 10.2% and an EPS of 5.6 sen in its 1QFY19.

 

Property players well represented

Seal is a property developer with projects in various locations in the peninsula, and it also has mall management and commercial leasing arms. It is further involved in timber-related activities such as logging, plywood manufacturing and sale of timber.

It saw its 1QFY19 revenue slip marginally year-on-year (yoy) to RM31.1 mil from RM33.2 mil. Nonetheless, its bottom line was significantly higher at RM13.4 mil against RM962,000 over the same period.

In a filing with Bursa Malaysia, management says lower revenue from its Queensville project in Bandar Sri Permaisuri was the cause of the contraction. Meanwhile, its profit was boosted by the disposal of a parcel of land and by timber activities which were carried out during the quarter.

The company plans to remain focused on the delivery of its Queensville project which it expects to complete in FY19. It also says it will be developing its timber-related activities and leasing management business to drive results.

Another property player, Selangor Dredging Bhd, rounds up the top three with a PB ratio of 0.31. Its book value per share is RM2.06 against its Jan 11 close of 64 sen. It recorded a ROE of 10% in its 2QFY19, while EPS for the period was 1.9 sen.

In the period under review, it notched a stronger yoy revenue of RM71.9 mil versus RM55.9 mil. This translated into a better net profit of RM8.3 mil from RM2.92 mil previously.

Management credits the better topline to the effectiveness of a robust marketing strategy undertaken by the group.

The stronger net profit was driven by better turnover, cost savings from the final claims for completed projects and the recognition of revenue and profit from its UNA serviced apartment project during the quarter under review, it said in a filing with the bourse.

Property players are the best represented among the top 10 companies on the list, with five entities making the cut. In fourth place is Dutaland Bhd, sixth is Amcorp Properties Bhd while ranked 10th is Country Heights Holdings Bhd.

Despite this, analysts expect the property segment to remain subdued. The past several years have been challenging for residential property players, particularly due to high prices pricing consumers out, stricter lending policies and weak consumer sentiment.

In 2018, developers started to move towards offering more affordable housing which was more in line with demand.

 

Lack of catalysts to turn the tide

However, an AmInvestment Bank report says sentiment will take some time to recover.

“While the government’s efforts to remove/reduce stamp duty and explore innovative funding options like crowdfunding and peer-to-peer (P2P) lending brings some hope in improving buyers’ sentiment, we believe the local residential property market still lacks major catalysts such as strong GDP growth and easing of lending policies to turn the tide,” says the brokerage in a report.

A Kenanga Research report similarly states “the sector still lacks catalysts while earnings quality is not stable, considering inventory clearing efforts and Redha’s commitment to lower house prices by 10%”.

It notes that valuations for some property stocks might call for a second look but that it can see no strong earnings or sales catalysts which will drive recovery in the near term.

“Investors wanting to take positions in developers which have low valuations will need to ride out the uncertainties and earnings quality risks over the next 12-24 months,” it adds.

The property and industrial products & services segments are tied with the most companies on the overall list, with each represented by 11 entities.

The highest-ranked industrial products & services player is ATTA Global Group Bhd in seventh spot with a PB ratio of 0.35. Its book value per share comes in at RM1.63 versus 58 sen on Jan 11. It delivered a ROE of 10.4% and an EPS of 0.39 sen in its 2QFY19.

Leon Fuat Bhd and Southern Steel Bhd were the other industrial products & services counters that made it to the Top 10. FocusM



This article first appeared in Focus Malaysia Issue 318.