Jul 13, 2017


Top 10 Bigcap Stock Picks. Top 10 Small Midcap Stock Picks

Portfolio & stocks selection criteria. While we remain an advocate to portfolio exposures with a combination of stocks in the following order of preference (high to low): (i) inherent earnings quality, (ii) attractive valuation, and (iii) Growth at Reasonable Price (GARP) strategy Nonetheless, we are also mindful that the risks associated with these return expectations are also elevated due to the geopolitical risks which have a big influenced in market sentiment.

Changes to Top 10 list. We made four changes to our current list of Top 10 stock picks due to the following reasons:
- Kossan, Maybank and CIMB were removed due to their price run up during Q2 2017.
- Meanwhile, Gas Malaysia is relegated due its slower price appreciation todate and that there are other counters that an even bigger upside.

• In place of the above relegated stocks, we introduce SP Setia, AirAsia, Petronas Dagangan and Public Bank to our Top 10 list.   

Top 10 picks of bigcap stocks.

Below is a list of 10 bigcap stocks that fit the above mentioned criteria, which come from various sectors within our stock universe

- Malaysian Resources Corporation Berhad (BUY, TP: RM2.08). We are steadfast on the prospect on MRCB’s earnings estimates moving forward for FYE17 from (1) picking up of construction activities for Cyberjaya City Centre and Kwasa Damansara. (2) Strengthening of its balance sheet through rights issue that could possibly reduce its total debt of RM3.7bn to RM2.1bn (minimum scenario). (3) Potential rolling out of infrastructure projects under the National Development Planning (NDP) which reiterates the government commitment to boost rural and urban connectivity.

- Bermaz Auto Berhad (BUY, TP: RM2.50). Key catalyst: (1) Attractive dividend yield of 8.6% underpinned by net cash which accounts for 12% of market. (2) Value unlocking from the listing of BAuto Philippines (BAP). Current market cap attributes practically no value to BAuto’s stake in BAP relative to the 16x indicative IPO valuation and historical sector valuation of 12x (for Malaysian autos). (3) A more than doubling in associate earnings contribution to group (via 30%-owned Mazda Malaysia SB and 29%-owned Inokom) given a massive export market expansion. (4) Launch of the new CX5 and new CX9 which will drive a recovery in volumes and margins.

- Affin Holdings Berhad (BUY, TP: RM3.30). We continue to be encouraged by the Group’s future prospect and we believe that the Group is building its niche and this will ensure profitability based on (1) selective and cautious approach towards asset and loans growth, (2) believe that the Group will be in a good position to take advantage of any upswing in conditions with transformation instituted at Affin Bank and Affin Islamic Bank, and (3) income growth momentum will be maintained given the Group’s proactive management of its assets and liabilities.

- SP Setia Berhad (BUY, TP: RM4.13). We like SPSETIA due to: i) its plan to achieve FBMKLCI status is now fast track to 2018 (from 2020), ii) attractive price for the I&P deal, as we estimate that the market value of its landbank is RM6.15b (against its purchase price of RM3.65b) and iii) good dividend yield of 5.1%.

- AirAsia Berhad (BUY, TP: RM3.94). Airasia remains our top aviation sector predicated on: 1) stable demand growth with conservative Available Seat Kilometers (ASK) expansion of +10%; 2) monetisation of Asia Aviation Capital (AAC) that could potentially lead to special dividends; 3) further consolidation of all individual erating airline companies under the AirAsia Group could provide better clarity on combined performance of all these companies as opposed to Malaysia AirAsia.

- Tenaga Nasional Berhad (BUY, TP: RM16.80). Key catalysts: (1) Higher dividend catalyst on the back of an under-geared balance sheet and capital optimisation exercise (2) Overseas expansion provides scope for stronger growth in the mid-term (3) Strong earnings visibility post-ICPT implementation (4) Tenaga is a liquid proxy to the GDP growth outperformance and stronger trade, but share price has yet to move meaningfully relative to the broader market

- Telekom Malaysia Berhad (BUY, TP: RM7.77). We are comforted by the fact that UniFi’s customer base and ARPU continue to increase at a steady pace. Moving forward, we view that the progressive growth in TM’s broadband customer base would be further driven by the HSBB phase 2 and SUBB projects. On the mobility segment, the group’s target to launch Webe’s new prepaid plan in 2H17 remains intact. We opine that the ‘quad-play’ offering would further strengthen TM’s position in the telecommunication industry.

- Kuala Lumpur Kepong Berhad (BUY, TP: RM29.25). We opine that the company should fare better against other planters as for the Company earnings resiliency and its good FFB production growth estimated at 8% (highest among index-linked plantation stocks. It should be able to take advantage of the upcoming the pre-stocking activity ahead of Mid-Autumn
Festival should boost demand for palm oil from China from September onwards.

- Petronas Dagangan Berhad (BUY, TP: RM28.00). Key catalyst: (1) Petronas’ committed capital expenditure plan focusing on downstream oil and gas segment. (2) Opex to maintain at such levels in-line with the company’s Commercial Excellence initiatives. (3) the downstream utility and retail fuel segment is expected register commendable year-over-year earnings growth, offer above risk- free rate dividend yields and acceptable capital upside.

- Public Bank Berhad (BUY, TP: RM7.57). We continue to like the Group’s ability to achieve a robust loans growth whilst maintaining its asset quality. We also like the fact that the Group was able to manage its funding cost well which led to improvement in NIM. As a result, we expect that any NIM compression will continue to be manageable for the Group.

Top 10 Stock Picks

bursa malaysia top 10 picks

Top 10 Small Midcap Stock Picks

- Tune Protect Berhad (BUY, TP: RM2.18). Our positive is on the back of the Group’s various ongoing initiatives for product innovation, customer oriented and channel, and (2) Big tie up between Tune Protect and AirAsia is set to boost earnings moving forward.

- Dabochi Berhad (BUY, TP: RM3.02). Key Cataysts: (1) Indonesia and Myanmar to drive growth, It is securing new clients and orders, and closing in operational gaps and (2) Improving margins by cost past through mechanism to its major customers and operational cost reduction through better wastage control and operational efficiency.

- Amanah Raya REIT Berhad (BUY, TP: RM1.15). We recommend to company for (1) for its education property exposure (42% gross rental contributed from education properties) where rental reversion is typically resilient at 5-7%. (2) Prospect for asset management of ARREIT is positive following the entry of Kenedix Inc. as a substantial shareholder in December 2016. (3) Attractive dividend yield at 5.7%.

- Ta Ann Berhad (BUY, TP: RM4.30). We recommend the company due to (1) its plantation division earnings growth should remain strong due to high FFB volume growth expectation at 10%. (2) Its timber division is expected to remain profitable due to the support from high export logs price.
(3) It is a key laggard compared to its peers and trailed the KL Plantation Index despite its decent fundamentals.

- Hock Seng Lee Berhad (BUY, TP: RM2.00). Key catalysts: (1) Earnings make a comeback during the 2QFYE17-3QFYE17 as HSL would be able to recognize billings from Pan Borneo project. (2) HSL’s key competency in sewerage and wastewater engineering will anchor its future earnings prospect due to the strong need of efficient wastewater and sewerage connection in Sarawak. (3) HSL’s land banks are strategically located to be developed under the public housings such as Projek Perumahan Rakyat (PPR) and Projek Perumahan Penjawat Awam (PPA1M).

- Tasco Berhad (BUY, TP: RM2.91). We see positive impetus for Tasco in FY18 with acquisition of cold chain logistics assets. This would bode well for Tasco, as it is propelled from having nil cold chain assets to a market leader in the segment. Apart from that, a nascent recovery in international trade growth and an improving manufacturing sector would augur well for the company

- Muhibbah Engineering Berhad (BUY, TP: RM3.24). We reiterate our recommendation for the company due to the quality orderbook of RM1.86bn, or approximately 36 months (3.5x construction revenue cover) backed by recurring cash flow for its concession asset in Cambodia which has contributed 5-year median of 24.0% percent to its operating income.

- United U-Li Berhad (BUY, TP: RM4.88). Key catalysts: (1) Management targets to improve exports contribution from 20% to at least 30% in the next two years. (2) Modernising integrated facilities further with potential to expand operations at its new Nilai plant (3) As cables and electrical components are essential parts of a building, U-LI stands to benefit from the slew of infrastructure projects domestically and regionally.

- Tiong Nam Berhad (BUY, TP: RM2.08). We like Tiong Nam for its market leading position in the integrated logistics industry. Meanwhile, an IPO of its logistics assets into a REIT could provide immediate rerating catalyst for the stock, giving rise to the potential of special dividends.

- Spritzer Berhad (BUY, TP: RM2.83). We like Spritzer for its i) resilient earnings due to its defensive business model, ii) strong position as market leader in Malaysia’s bottled water industry with over 40% market share and iii) strong balance sheet with net cash position.

Top 10 Small Midcap Stock Picks

small cap top 10 picks

source: MIDFResearch - 11/07/2017