Focus List: Finding undervalued stocks amidst market turmoil

By Doreenn Leong

THE Malaysian economy grew at its slowest pace in a decade at 4.3% last year from 4.7% registered in 2018 as the country saw lower output of palm oil, crude oil and natural gas, and a fall in exports amid the US-China trade war.

The FBM KLCI declined 6.02% or 101.82 points to end 2019 at its intraday low of 1,588.76.

Investors hoping for a better year in 2020 are disappointed as the world grapples with the Covid-19 outbreak, which started in December last year, as well as tumbling crude oil prices.

For the Malaysian economy, it was also badly affected by the uncertainties caused by the power tussle resulting in a new government taking over the country.

The FTSE Bursa Malaysia KLCI (FBM KLCI) sank to a 10-year low of 1,280.63 on March 16. Investors continued to offload their stocks, sending the bellwether index to close at 1,259.88 on March 23.

Is it time to look at equities now that some stocks would be trading at cheap valuations and some undervalued?

“Unfortunately, it is not time yet as we still don’t fully know when is the bottom. For example, an extension of the Movement Control Order (MCO), if it happens, may cause another selldown,” says Etiqa Insurance and Takaful chief strategy officer Chris Eng.

Prime Minister Tan Sri Muhyiddin Yassin announced the MCO, which took effect from March 18 to April 14.

For MIDF Research, it believes value is emerging in Bursa Malaysia after a continuous selloff.

The research house reckons the Covid-19 outbreak will be under control in four to six months’ time, similar to the time China took to rein in the disease.

“The equity market would be trapped in a cautious mood or even occasionally under extreme risk aversion, perhaps until the third quarter of this year. However, as the total number of infected cases begins to dwindle, we envisage the equity market shall thereafter regain some upward momentum together with the tapering of risk aversion among investors.

“We reckon the additional financial liquidity and outlays would help to propel the recovery of the world’s equity markets with the local benchmark FBM KLCI scaling towards its 2020 baseline target of 1,480 points,” it says.

MIDF adds that while it expected equity markets to recover from current levels, it was cognisant of the fact that markets are extremely volatile at the current juncture. It pointed out that gyration of circa 5% (sometimes more) in either direction seemed to be the norm for now. This presented a very precarious situation for investors to navigate.

“We believe that there are pockets of opportunities for investors to take advantage of despite the volatile market. This is especially so given the significant retracement in share prices. However, we also advise caution.

“We believe that investors would need to select stocks which have solid fundamentals and defensive earnings in nature. Furthermore, this should be paired with those which give very attractive dividend yields which should moderate any downside risk,” said MIDF.

While most investors will probably stay on the sidelines pending a better gauge on the situation, there are stocks which may be worth looking at as they are deemed undervalued based on recent numbers.

Companies on our Focus List this year have a combined market capitalisation of RM55.1 bil. There are a total of 30 listed companies versus 40 companies with a total market cap of RM24.1 bil in last year’s list.

Using a PB ratio

Our list presents 30 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 the stock’s fundamentals and evaluate it against a range of metrics before making any decision.

Based on our list, property developers dominate the top four positions in terms of lowest PB ratio.

The property developers which are most undervalued are Symphony Life Bhd, Eupe Corporation Bhd, Ewein Bhd and Sunsuria Bhd. The other property developers on our top 30 list are Damansara Realty Bhd, Oriental Interest Bhd and MB World Group Bhd.

Symphony Life Bhd is the most undervalued stock on our list with a PB ratio of 0.18 times with its book value per share at RM2.07 versus its closing share price of 38 sen on March 6 (our cut-off date for this article).

The property developer recorded a ROE of 12.1% for the third quarter ended Dec 31, 2019. Its earnings per share (EPS) came in at 6.51 sen for the same period.

The company, formerly known as Bolton Bhd, is a high-end property developer with prime land banks in affluent areas. However, given the competitive landscape, it has taken big steps to make its products more attractive by offering better value-for-money.

It will be launching more affordably-priced products in strategic locations, namely the Majlis Sukan dan Kebajikan Anggota Kerajaan (Maksak) land along Jalan Cheras in Kuala Lumpur, the second phase of TWY in Mont Kiara and next to Kwasa Land in Subang.

The biggest project Symphony Life is embarking on is the 19-acre prime land in Lembah Ledang, Damansara Heights next to Istana Negara with an estimated gross development value of RM7 bil, which will keep it busy for at least another 10 years.

In 3QFY19, Symphony Life posted a higher net profit of RM35.3 mil from RM21.5 mil a year ago despite recording a lower revenue of RM68.4 mil versus RM74.8 mil.

For the nine months just ended, it saw an increase in net profit to RM82.6 mil from RM53.2 mil a year ago on the back of higher revenue of RM198.1 mil versus RM138.6 mil.

It attributes the improvement in net profit mainly to higher contributions from Star Residences, TWY Mont’ Kiara and Union Suites @ Bandar Sunway.

Eupe Corporation Bhd takes the second spot with a PB ratio of 0.24 times. Its book value per share stands at RM2.57 versus its March 6 closing price of 61 sen. The developer offered investors a ROE of 11.7% and an EPS of 5.15 sen in its third quarter ended Nov 30, 2019.

Kedah-based Eupe is focused on a range of housing segments, from affordable, mid-range through to high-end developments. Despite the challenging market conditions, it continues to expand in Kuala Lumpur.

Its group managing director and CEO Datuk Beh Huck Lee says the company’s key projects in Kuala Lumpur – Novum@South Bangsar and Parc 3@Cheras comprising 729 serviced apartments, Novum, which was launched in 2016 as Eupe’s first KL project, KL South – are doing well.

In 3QFY20, Eupe posted a higher net profit of RM6.6 mil compared with RM4.43 mil a year ago despite registering a lower revenue of RM56.63 mil versus RM94.35 mil.

The decrease in revenue reflects the company’s increasing focus on its KL property development arm, which is in a short-term transition stage as its first KL project, Novum@South Bangsar project is nearing completion and in the process of obtaining Certificate of Completion and Compliance (CCC) approvals before handover to buyers, thus much lower revenue has been recorded.

To offset this decrease, revenue from its second KL project, Parc3@Cheras will take precedence in the coming 12 months as the pace of construction and sales take-up rate for that project gather momentum.

Next on our list is Penang-based Ewein Bhd, which showed a PB ratio of 0.41 times. Its book value per share stands at 92 sen versus its March 6 closing price of 38 sen. The developer gave investors the highest ROE of 16.8% among the top four developers on our list and an EPS of 1.36 sen in its fourth quarter ended Dec 31, 2019.

The company is developing City of Dreams, a luxury serviced apartment project located between Tanjung Tokong and Gurney Drive in Penang and the Wellness City of Dreams, a 50-acre wellness resort city in Gurney Drive.

It also has three other divisions: manufacturing, property investment and management, and e-commerce.

Under its manufacturing division, it provides solutions for precision sheet metal fabricated parts used in audio, video and acoustic equipment, satellite antennas, computer and peripherals, domestic appliances, KVM switches, electrical products, electronic devices as well as electrical and electronic support systems. precision sheet metal fabricated parts, product finishing and design, and the fabrication of precision moulds, tools and dies.

Its e-commerce segment is engaged in a wide range of online ventures, including business-to-consumer marketing and distribution of Malaysian products including bird’s nest, spices, cooking oil and coffee to China.

For the financial year ended Dec 31, 2019, Ewein posted an increase in net profit to RM41.6 mil from RM39 mil in the previous year while revenue rose to RM266.3 mil from RM199.5 mil.

Fourth on our list is Sunsuria with a PB ratio of 0.48 times with its book value per share of RM1.09 versus its closing price of 52 sen on March 6.

The property developer recorded a ROE of 14.3% for the first quarter ended Dec 31, 2019. Its earnings per share (EPS) came in at 1.02 sen for the same period.

In 1QFY20, the property developer registered a lower net profit of RM9.1 mil compared with RM10.7 mil a year ago while revenue dropped significantly to RM47.5 mil from RM82.9 mil, mainly due to the completion of The Olive and Monet Lily projects in the last quarter of FY19.

The group’s on-going projects are Bell Suites SOHO & retails, Monet Springtime, Monet Garden, Giverny Walk and Tangerine Suites at Sunsuria City and Forum II SOHO, offices and serviced apartments at Setia Alam.

Next is Can-One Bhd with a PB ratio of 0.48 times. Its book value per share stands at RM6.11 versus its March 6 closing price of RM2.91. The company offered investors a ROE of 14.22% and an EPS of 307.62 sen in its fourth quarter ended Dec 31, 2019.

In FY19, the company posted a surge in net profit to RM718 mil from RM46.6 mil in the previous year on the back of a higher revenue of RM2.3 bil versus RM385.6 mil.

The increase in revenue was mainly due to consolidation of KJCF Group’s revenue. This was mainly attributable to gain from disposal of subsidiaries and gain arising from acquisition of KJCF.

How we ranked them

To compile the Focus List, we used the price-to book (PB) ratio as the major metric to rank the companies. All loss-making companies were excluded while only companies with at least a 10% return on equity (ROE) were included. We also took into account each company’s price-earnings (PE) multiple and earnings per share (EPS).

PB ratio is calculated by dividing a stock’s closing price by its latest book value per share.

Generally, a lower PB ratio indicates a counter is undervalued.

However, a low PB ratio could also mean the stock is viewed unfavourably by investors for various reasons. Investors should therefore always evaluate stocks across several valuation methods before investing. – April 3, 2020

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