Fund managers’ stock picks

abgsedapmalam

Saturday, 10 January 2015

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Stocks on Bursa Malaysia are off to a rocky start in 2015. It’s a continuation of what has been happening late last year when the decline in crude oil prices and the prospects of a better economy and higher interest rates in the US meant that there was an exodus of foreign money from the local stock market. With the outlook for Malaysian equities now joined at the hip with crude oil prices, there is a thought that fortunes on Bursa Malaysia will be dictated by external events. Fund managers polled by StarBizWeek have their favourite stocks and have given their reasons why they like such counters.

GERALD AMBROSE

Managing director,

Aberdeen Asset Management Sdn Bhd.

Stock pick: Aeon Co (M) Bhd

THERE are currently several factors impacting consumer sentiment. To name a few, there are concerns over the strength of the local economy (which is compounded by the oil price situation) and high household debt, while over the short term, we expect uncertainty over the goods and services tax (GST) introduction and the recent AirAsia tragedy to further weigh on sentiment.

Consumer activity is expected to be weak at least for the first half of the year. Aeon would by no means be immune to such headwinds (along with other retailers locally), but we believe it not only has the capability to weather through the current conditions but also emerge from this soft patch in a stronger position. On the first point, it is worth noting that its retail operations are aimed at mass-market consumers, and while the products offered at its department stores could be termed “discretionary”, they are diversified.

There are also its supermarkets, which are a significant contributor to Aeon’s retail operations and would remain relevant to shoppers regardless of the consumer cycle. Note that the company’s retail operations only contribute to roughly half of its earnings. The other half comes from its property management operations.

Financially, Aeon has been able to churn out strong cashflows (almost RM500mil worth from its operations last year) and has a strong balance sheet with barely any debt.

Secondly, the company has been accelerating its build out of new malls into the second and third-tier cities in Malaysia. While we expect the start-up costs from these new malls to further weigh on its short-term financial performance in conjunction with the current retail environment, the company would benefit from greater contribution to its earnings, both on the property management side and also on its retail performance, especially once consumer sentiment returns.

THOMAS YONG

Chief executive officer,

Fortress Capital Group.

Stock pick: Berjaya Auto Bhd

Automobile distributor and retailer Berjaya Auto Bhd (BAuto), which is set to become more competitive in pricing this year following the development of its local assembly plant and its huge exposure to the Japanese yen, is currently working to its advantage following the weakening of the currency.

BAuto is on track to increase more completely-knocked down models from local assembly plants in 2015, which would allow it to set competitive pricing for driving sales growth.

Mazda had a market share of about 2% as of November 2014 that has contributed to an impressive volume sales of about more than 30% for its first half of the financial year ending April, 2015.

The higher growth momentum compared to the sector is likely to continue for the rest of the year with the introduction of new models. It is expected to launch a new Mazda 2 in January and CX-3 in July.

Apart from that, its venture into the Philippines since January 2013 has been successful and the potential is huge, as the Philippines’ vehicle industry volume is expected to grow by more than 20% this year.

On rewarding shareholders, the company is expected to pay out 40% of its profits as dividend.

With a net cash position of about RM300mil as at the first half of its current financial year, BAuto has ample room for capital management, with an option of either a higher dividend payout or further expansion.

On risk, it would stem from increased competition among its peers if the consumer sentiment deteriorates further as a result of higher living expenses in view that the GST would be effective in April.

Phillip Capital Management Sdn Bhd

Stock pick: OCK Group Bhd

OCK is one of the gems in the mid-to-small-cap universe. Although small, OCK offers huge growth potential. The main gist of it is its plan to develop a recurring income business model, riding on the shift in focus by telco operators from capital expenditure (capex) on non-core competencies such as network infrastructure to operating expenditure in order to streamline their cashflow.

At present, OCK owns and leases 240 transmission sites to U-Mobile, P1 and Celcom, and that will provide earnings visibility for at least the next 10 years. Presently, there are about 23,000 telco sites nationwide; hence, there is latent potential for OCK to acquire and lease them back to telco operators. Recently, OCK also managed to grab a small pie of the T3 extension projects (30 out of 400 sites) for rural tower construction.

Although small, we see the win potentially opening up more doors for OCK to secure similar contracts, moving forward. It is also growing into tower managed services where it maintains 4,000 sites for Maxis, which would provide relatively regular income. With telco operators having completed most of the 3G coverage, these players have since moved into the 4G long-term evolution or LTE space, where they plan to roll out more than 5,000 4G sites collectively. This definitely offers huge business opportunity for OCK.

We also like OCK for its stout growth regionally, namely in Cambodia (800km fibre optic cable-laying), Indonesia and recently, Myanmar. Its biggest move into regional territory was the acquisition of a 85% stake in PT Mulia, an Indonesian tower maintenance company which is currently maintaining about 7,500 sites and is targeting to increase this to 20,000 sites within the next three years. This alone will raise financial year 2015 (FY15) earnings by 15% on top of enjoying recurring cash flow.

DANNY WONG

Chief executive officer,

Areca Capital Sdn Bhd.

Stock pick: Barakah Offshore Petroleum Bhd

Its orderbook of RM2.1bil will give Barakah earnings visibility for the next two to three years. This will add upside to the stock, as it used to trade at mid-cap levels and 13 times price-earnings (PE), but has since pared down to an attractive level of between eight and nine times forward-PE.

While the upside is there, the downside is also minimal. Its earnings for 2015 would roughly be between RM80mil and RM100mil, and if its shares are fully diluted, then this would translate to an earnings per share (EPS) of 12 sen.

At the normal PE level of 13 times, this could mean a 114% upside, while at current PE levels, it could be a 33% upside instead.

Barakah’s balance sheet is also healthy. It is fundamentally strong and there is relatively low balance sheet risk as compared with exploration and production (E&P) companies.

Typically, for those exposed to E&P, their capex is high, which may affect gearing, and ultimately, the balance sheet. Although many talk about the new era of oil prices, or the new equilibrium of oil prices, Barakah is not affected as much as other oil and gas players due to its size. Its operations are also service and maintenance-based.

Barakah’s contracts are strategic, as it has been approached by Petroliam Nasional Bhd. Its earnings are largely dependant on its ability to deliver, of which it has a good track record.

It has a good profile for a company that has been listed for just over a year.

AZLAN HUSSIN

Chief executive officer/chief investment officer,

MIDF Amanah Asset Management Bhd.

Stock pick: Prestariang Bhd

This stock has taken a beating over the past six months since reaching its peak of RM2.41 in July 2014 after a few quarters of disappointing results. However, at this juncture, the stock is set for potential re-rating catalysts coming from the Programme for International Student Assessment (PISA) accelerated training (PAP) programme, “IC Citizen” contract extension, and the Microsoft software subscription for all Government ministries.

The haemorrhage from University Malaysia of Computer Science and Engineering, or UniMY, has been mitigated with the emergence of Majlis Amanah Rakyat (Mara) as a new shareholder, guaranteeing 500 sponsored Mara students starting in January 2015.

If one has followed the developments in our education sector closely, one will notice the slew of reforms in the sector, most notably at the primary and secondary levels. The upskilling of teachers and higher pay with higher academic results for teachers has been implemented, the revamp of the UPSR and SPM syllabi to integrate a more holistic base assessment is in motion, and in the nearer term, the next Trends in International Mathematics and Science Study (TIMSS) and PISA survey are due this year.

The PAP programme, in our view, is more crucial than ever and we think that Prestariang will be a major beneficiary of this.

The stock was trading at RM1.50 (P/E of 24.5 times) as of Jan 8, with a dividend yield of 3.3%. There is no real comparable peer in the same segment for Prestariang, as it is a very niche software licensing and ICT training provider to the Government. UniMY (tertiary) makes up only a very small percentage of its revenue. The consensus target price is at around RM2.04, giving it a 36.2% upside based on the RM1.50 price as of Jan 8.

LEE SOOK YEE

Chief investment officer,

Kenanga Investors Bhd.

Stock pick: IFCA MSC Bhd

IFCA is an ACE-listed business software solution company specialising in the property industry with a market share of 70% serving more than 1,500 customers in Malaysia and Asia. We like IFCA for its highly scalable business model and strong earnings growth in the next two years, underpinned not only by the GST software upgrade but also the sustainable web-based conversion business as well as overseas expansion.

Although IFCA’s 2014/2015 earnings will benefit strongly from the GST software upgrade in Malaysia, the perception that the company is a one-off GST play is misplaced. Its web-based conversion and regional expansion, especially penetrating into the Chinese market with more than 40,000 property developers (versus Malaysia’s 2,300) will propel earnings to the next level far beyond the current base.

Moreover, management is hands-on and has a clear roadmap for the company going into the next three years, including potentially launching new business initiatives like e-commerce and regional mergers and acquisitions.

Other catalysts include IFCA’s first dividend payout this year, an indication of its strong cashflow and net-cash balance sheet position, coupled with the likely migration of the stock to the Main Market of Bursa Malaysia in 2015.

Valuation-wise, based on our in-house FY15 EPS estimates, IFCA is trading at a FY15 PE multiple of 12.5 times, against a two-year EPS compounded earnings growth of more than 300%. We see substantial value in IFCA at current valuations.

Risks include a recession-like slowdown in economic conditions, which results in the closing down of the business of some property developers and an unexpected rise in competition, although we think the latter is less threatening, as IFCA is far more established than its next competitor. Moreover, customers tend to be sticky with little incentive to replace a software solution once implemented.