Stocks on Bursa Malaysia rode a rare wave of positive sentiment at the start of the new year, faring better than its regional peers. The benchmark FBM KLCI and the broader FBM Emas index ended 4% and 3.9% higher respectively for January, outperforming all three major US market benchmarks as well as major Asian markets, with the notable exception of Japan’s Nikkei 225 index.
Total traded volume surged sharply higher in January — compared against the traded volumes in the previous month and the average for 2023 — and especially for smaller cap stocks. As we all know, that bubble burst very quickly, with the subsequent heavy sell-off and losses in many speculative stocks. The FBM Small Cap index and FBM ACE index have since fallen well off their highs for the month but investor interest in large- and mid-cap stocks recovered (see Chart 1). Quality matters.
Asia Analytica selects 10 stocks at the beginning of each new year, based on themes we think would do well for that year. Our stock picks are always based on fundamentals — profitability, balance sheet strength and prospects. The portfolio is typically a mix of growth and more defensive stocks, the weightage dependent on our overall outlook for the year. As we always remind investors, it is not about maximising profits but maximising your risk-adjusted returns. Speculative stocks with little underlying fundamentals may give you very high returns, if you are lucky — but you also risk suffering big losses. And losses will, materially, set you back on your investing goals. Over the past nine years, our top 10 portfolios have, on average, far outperformed the FBM KLCI (see Chart 2).
Our top picks for 2024 are based on two major themes: property-construction and digitalisation. As is our usual strategy, we have also thrown in a few relatively defensive stocks, given the prevailing uncertainties in terms of economics (domestic and global) as well as geopolitics. The calculated beta (risk) for this portfolio is 0.57, well below the market average risk of 1.
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Despite the significantly lower risk profile, our stock selection did very well in January — far outperforming the broader market. All 10 stocks ended higher for the month — racking up gains totalling 15.8% on average. That’s almost four times the returns for the FBM KLCI and FBM Emas index. What’s more, the risk-adjusted returns are significantly higher at 27.9%.
The best-performing stock in January was KSL Holdings, which is our pick for the Johor property boom play. The property developer owns some 2,500 acres of land bank (80% of which is in Johor) and two flagship shopping mall-hotels in Johor Bahru and Klang, as well as a hot spring resort in Tebrau, Johor.
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KSL reported sharply higher revenue and profits in the first nine months of 2023 (9M2023). This was largely attributed to the rejuvenation of economic activity in the Johor region, which is benefiting from the spillover effect from Singapore (and strengthening purchasing power of the Singapore dollar relative to the ringgit). Notably, with a price-to-book value of only 0.43 times, KSL remains one of the cheapest Johor property stocks — even after the rally. Valuations are still about half that of its Johor-centric peers.
We believe the worst for the Malaysian property market is already in the rearview mirror. Don’t look in the rearview mirror for too long, though — you might cause an accident ahead. We will, very shortly, follow up with a separate article on the state of the Malaysian property industry. Suffice it to say that we are positive on the Johor and Penang property markets on the back of improving demand-supply dynamics. Demand for properties has stayed strong post-pandemic. On the other hand, the number of housing starts has remained below pre-pandemic levels. This means falling new houses completion up to 2027, at least — and that should result in a steady reduction in the residential property overhang.
Our picks in the property-related construction sector, Gamuda and Hume Cement Industries, also performed very well last month. Gamuda has steadily grown its engineering and construction order book post-pandemic, including recent contract wins in Australia. The order book now totals almost RM26 billion.
We expect to see more infrastructure project starts domestically, as outlined in Budget 2024, and likely more contract wins for Gamuda. Similarly, its property development segment is also enjoying strong sales momentum, with pre-sales reaching an all-time high of RM4.1 billion in FY2023.
The recovery in Malaysia’s property and construction activities would also benefit cement and concrete suppliers like Hume Cement. The company saw its earnings before interest, taxes, depreciation and amortisation (Ebitda) margin topping 20% in the trailing 12 months, for the first time since 2015, on the back of strong sales volume coupled with benign input costs. We think Hume Cement will be able to maintain its underlying strong business momentum with decent margins based on the current outlook.
For the digitalisation theme, we have REDtone Digital, LGMS and VSTECS. REDtone Digital is an integrated telecommunications and digital services provider with three main operating segments — telecommunications services, managed telecommunications network services as well as cloud and Internet of Things.
The company has a strong track record for winning government contracts in the past. It is well positioned to secure more jobs from ongoing digitalisation of the public services sector. For instance, RM800 million was allocated for the MyDigital Madani initiatives and an additional RM250 million was earmarked to replace and expand WiFi coverage in all public universities.
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LGMS is a leading cybersecurity firm in the region and has served more than 1,000 clients in the past 18 years, including Alibaba Cloud, TIME dotCom and Measat. Its business can be broadly categorised into three main segments, namely cyber risk prevention services (68.5% of total sales), cyber risk management and compliance services (23.3%), and cyber threat and incident response services (8.2%).
The company enjoys consistently high net profit margins (30%+) — better than many Bursa-listed systems integrators. It had net cash of RM70.7 million as at September 2023. We believe there are synergistic opportunities with one of its substantial shareholders, Japanese conglomerate Mitsui (25% stake), to further expand its services in the domestic market as well as potentially tapping into the rapidly growing cybersecurity markets in Asean.
VSTECS’ primary operations are in information and communications technology (ICT) distribution, enterprise systems and ICT services. We anticipate the latter two segments will be the key growth drivers, on the back of increasing adoption of digitalisation in businesses. The fact that they are also the higher margin businesses bodes well for overall profitability improvements. Valuations are attractive, its shares are trading at a price-earnings ratio (PER) of only 8.6 times. VSTECS has consistently paid around one-third of net profits as dividends, equivalent to a decent yield of 4.2% at current prices. The company’s balance sheet is also robust, with net cash totalling RM70.9 million.
In addition to the above-mentioned property-construction and digitalisation themes, we have also chosen four slightly more defensive companies to complete our top 10 stocks for 2024 — two undervalued and two high-yielding companies.
Insas, as we have written before, is a deep value stock whose current share price is far below its net assets value. The company’s 14.4% stake in associate (and separately listed) Inari Amertron alone is worth more than RM1.7 billion, compared to Insas’ market capitalisation of RM769 million. The company also has net cash of RM1.06 billion on its balance sheet and other smaller businesses, including a financial services and credit leasing operation that generates more than RM10 million in annual net income.
Favelle Favco is another undervalued stock with upbeat prospects for its oil and gas-related businesses, primarily cranes and automation solutions. The order book has been growing steadily on the back of relatively stable oil prices, and surged sharply higher in 9M2023. The order book totalled RM872 million at end-3QFY2023, providing good earnings visibility. Valuations are low — with a PER below nine times, well below the average for Bursa-listed oil and gas service providers. Positively, the company is rebuilding its cash, with net cash rising anew to RM42.3 million, after paying a bumper 89 sen per share dividend for FY2022 — a testimony to its cash flow generation ability.
The two high-yielding stock picks are UOA Development and United Plantations. The former is a property development and investment company focused on properties in Kuala Lumpur. Ongoing developments (gross development value) are worth some RM2.4 billion. Additionally, a good portion of its earnings comes from recurring rental income from investment properties, which include hotels, retail complexes and car parks. The stock is trading below its book value, at 0.85 times. With net cash of RM1.8 billion, the company is well able to continue paying above-average dividend yields. UOA Development upped dividends in 2023 to 30 sen per share, from 10 sen per share in the previous year.
And last but not least, United Plantations is one of the most efficient palm oil producers in Malaysia, given its high percentage of oil palm trees in prime production ages, use of mechanisation as well as exceptional plant breeding techniques. The Malaysian Palm Oil Board recently projected higher crude palm oil (CPO) selling price of between RM3,900 per metric ton (MT) and RM4,200/MT for 2024, compared to the average price of RM3,800/MT last year. At the same time, the company is seeing easing cost pressures in terms of fertiliser, chemicals and spare parts as well as improvements in labour shortage and field operations.
United Plantations has consistently paid out nearly all annual profits as dividends, with an average payout of 92% between 2020 and 2022. Dividends increased from RM1.40 per share in 2022 to RM1.80 per share in 2023. That translates to a net yield of 9.1% at the prevailing share price. It is sitting on RM784 million net cash.
Interested readers can visit www.absolutelystocks.com for more financial information on all stocks listed on Bursa and the Singapore Exchange S68 . Knowledge is your competitive advantage, and critical for long-term outperformance.
*The porfolio performance and table is not displayed as it is not updated due to early closing for Lunar New Year.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
