Small-cap stocks seen extending rally in Malaysia
Top fund manager says investors are underestimating growth prospects
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Top fund manager says investors are underestimating growth prospects
Bloomberg
08 September 2014
The manager of Malaysia’s top-performing equity fund says the nation’s small-cap stocks will extend a rally that sent the benchmark index up 20 per cent this year because investors are underestimating growth prospects.
Eastspring Investments Bhd, whose small-cap fund has returned 53 per cent during the past 12 months for the best gain among 205 peers, plans to boost holdings of small- and mid-cap companies, chief executive officer Lynn Cheah said in an interview. The FTSE Bursa Malaysia Small Cap Index is valued at 11 times estimated earnings, a 30 per cent discount versus the FTSE Bursa Malaysia KLCI Index of the largest stocks.
Profits at companies in the index will climb 35 per cent in the next 12 months, compared with a 5.4 per cent gain for the KLCI, analyst estimates compiled by Bloomberg show. Smaller businesses including Inari Amertron Bhd, the semiconductor packager that doubled earnings in the fourth quarter, are outperforming as money managers favour companies with the fastest growth, according to Ms Cheah.
“We continue to see great value in a number of small- and mid-cap equities at the moment,” Ms Cheah, who oversees about RM25 billion (S$9.8 billion) in Malaysia, said at her office in Kuala Lumpur on Sept 1. “Some of these stocks are undiscovered gems.”
The Eastspring Investments Small Cap Fund invests in Malaysian companies with market values at or below RM1 billion. Its top holdings include Inari Amertron and Berjaya Auto Bhd, along with construction contractors Pintaras Jaya Bhd and Pestech International Bhd, according to data compiled by Bloomberg.
Inari, whose main client is US-based Avago Technologies Ltd, has jumped 92 per cent this year. Inari said on Aug 26 that its fourth-quarter profit surged 135 per cent from a year earlier. Berjaya Auto, which sells cars for Mazda Motor Corp, has risen 72 per cent this year. Its fourth-quarter net income doubled to RM48.1 million.
The small-cap gauge rose one per cent at the 5 pm close on Friday, the most in seven weeks, compared with a drop of less than 0.1 per cent for the KLCI index.
“Smaller-cap companies are in a high-growth stage,” Ms Cheah said. “The process of re-rating these stocks to their fair values will generate superior returns for investors. In contrast, big-cap companies operate in a mature stage.”
Even after Malaysia became the fastest-growing economy in Asia after China last quarter, profits fell at some of the South-east Asian nation’s biggest companies. Genting Malaysia Bhd, a casino operator, posted a 45 per cent drop in second-quarter earnings, while Felda Global Ventures Holdings Bhd, an oil-palm planter, reported a 53 per cent decline.
Genting has dropped 1.1 per cent in Kuala Lumpur trading this year, while Felda has declined 14 per cent. The KLCI index gained 0.1 per cent.
CIMB Group Holdings Bhd, Malaysia’s second-largest bank, cut its year-end target for the KLCI to 1,950 from 2,030 in a Sept 2 report after a “letdown” in the latest earnings results.
While small-cap stocks are still less expensive than their larger counterparts, valuations are increasing. The small-cap index’s forward price-to-earnings ratio is 11 per cent higher than it was a year ago, according to data compiled by Bloomberg.
Ms Cheah says she still sees buying opportunities and her firm is attracting more clients who want to invest in smaller companies. Eastspring is seeking to double its asset-management business in three years, she revealed.
“Stock selection is key to outperformance for the rest of the year,” Ms Cheah added.