CIMB Research sees volatile market in H2 of 2018
KUALA LUMPUR: CIMB Equities Research believes the domestic equity markets will remain volatile in 2H18 as the ongoing review of policies by the new government pose earnings risk to corporates, especially small-cap companies.
In its strategy report issued on Wednesday, it noted other challenges in 2H18 include slower GDP growth, revenue pressure from possible policy or regulatory changes, escalating trade tensions between China and the US, rising operating cost pressures and global monetary tightening.
Earnings downside risks
“Small-cap companies’ earnings could continue to disappoint the market in 2H18, given the rising operating cost pressure environment and volatility in the ringgit, in our view.
“Big-cap companies usually handle changes in the economic environment better than small-cap firms as they tend to identify changes in the economic environment more quickly and have greater economies of scale,” it said.
CIMB Research pointed out that as investors remain cautious on the market outlook in 2H18, it believes there would be less interest in small caps as investors look for value and a more defensive portfolio by investing in blue-chip stocks, for example.
Other challenges in 2H18 that may hamper investor interest in small-cap stocks include slower GDP growth, revenue pressure from possible policy or regulatory changes, escalating trade tensions between China and the US, rising operating cost pressures and global monetary tightening.
“We remain positive on small caps in the long run, given our view that small-cap stocks offer investors stronger overall earnings growth profile and are under-institutionalised.
“Also, in the longer run, we believe the small-cap space would continue to provide investors opportunities to unearth ‘alpha’ gems,” it said.
CIMB Research is positive on the following three themes:
First theme is consumer stocks with defensive earnings. These include stocks like Bonia, CCK, Kawan Food and Lee Swee Kiat.
Second, bombed-out stocks with attractive valuations such as Signature and Tan Chong Motor
It also sees value emerging for Prestariang if its SKIN concession is intact. In the construction space, it likes Muhibbah Engineering for its robust Cambodian airport concessions.
Top three picks: CCK, Lee Swee Kiat, Kawan Food
Overall, it remains neutral on the small-cap space. Despite a challenging 2H18 outlook for small-cap stocks, it believes that investors should take a longer-term view of its strong earnings growth potential. The research house projects three-year earnings per share (EPS) compounded annual growth rate (CAGR) of 19.8% (FY18-21F).
The research house’s small-cap picks are trading at an attractive 11.2 times CY19F price-to-earnings (P/E) on average, with double-digit returns on equity (ROEs) of 13.7%-14.6% (CY18-19F) and decent dividend yields of 3.9-3.8% (CY18-19F).
“We believe that any sell-down in our selection of small-cap stocks offers investors opportunities to accumulate. “Our top three picks are defensive consumer stocks CCK Consolidated, Lee Swee Kiat and Kawan Food. In our view, stocks with superior CY18-19F dividend yields are LBS Bina and Prestariang,” it said.