This article first appeared in The Edge Malaysia Weekly on July 1, 2024 - July 7, 2024

IT must have been a fruitful six months for a lot of investors on Bursa Malaysia, thanks to the positive market sentiment. All the stocks in The Edge’s portfolio, except Supermax Corp Bhd (KL:SUPERMX), recorded positive returns during the period under review.

Eco World International Bhd (KL:EWINT), whose shares gained 35.5% year to date (YTD) led the way, in line with the strong market interest in property stocks. Following the rally in the company’s share price, we are taking profit and switching out of the stock.

However, we are keeping another property stock in the portfolio — OSK Holdings Bhd (KL:OSK) — which rose 22.6% YTD. As at end-March 2024, the group had unbilled sales of RM1.1 billion. Its total land bank of 1,898 acres has a potential gross development value of RM16.2 billion.

Shares of Dialog Holdings Bhd ­(KL:DIALOG) and Focus Point Holdings Bhd (KL:FOCUSP) gained 16.9% and 14.1% respectively YTD. ­Dialog’s share price slipped below the RM2 level before rebounding to close at RM2.42 last Thursday on better earnings, particularly due to higher production from upstream activities.

In its latest January-March quarterly results, Focus Point reported a 22.89% year-on-year increase in net profit to RM7.41 million, underpinned by strong sales in both its optical and food and beverage divisions.

Apart from Eco World International, we are also switching out of Supermax and Dialog during this mid-year stock review. While it is the underperformer in the portfolio, when the US announced tariffs on gloves from China, Supermax’s share price hit an intraday high of RM1.09 on May 15 and 16, giving investors who may have made a tactical move to exit then a return of almost 15% if they had invested from day one of 2024.

Investor sentiment on the glove sector remains cautious as the quarter ended March still showed weaknesses with the market seen to return to equilibrium in 2026.

While Dialog is still a favourite of analysts, with many of those covering it having a “buy” call on it, for the purpose of this exercise, we are switching out of the technical service provider for exposure to another oil and gas (O&G) counter that we hope offers better upside potential.

In this review, we are adding these stocks to the portfolio: Public Bank Bhd (KL:PBBANK), Dutch Lady Milk Industries Bhd (KL:DLADY), QES Group Bhd (KL:QES), Kelington Group Bhd (KL:KGB) and Hibiscus Petroleum Bhd (KL:HIBISCS).

As shares of Public Bank have come under pressure — down 6.8% YTD against the Bursa Malaysia Finance Index’s 6.9% gain, we take this opportunity to add the banking group to our portfolio. Based on the consensus target price of RM4.75 compiled by Bloomberg, the stock offers a potential upside of 18.8% against its closing price of RM4 last Thursday. Furthermore, the stock is supported by a decent dividend yield of about 5%.

AmInvestment Bank Research believes Public Bank is a laggard with appealing valuations. In a June 26 note, it upgraded the bank to a “buy” from “hold” with an unchanged fair value of RM4.50, supported by a return on equity of 11.9%, leading to a FY2024 price-to-book value ratio of 1.5 times.

Although shares of Kelington, which provides ultra-high purity gas solutions to tech players, have surged 57.6% YTD, the company’s growth prospects still look positive. As at end-March 2024, its order book stood at RM1.54 billion, of which RM1.25 billion remains outstanding. With its sizeable order book and tender book, RHB Research highlights in a May 27 note that there could be another record year in the making for Kelington. In FY2023, its net profit nearly doubled to RM102.65 million from RM55.75 million in FY2022.  

Another tech play added to The Edge’s portfolio is QES, an automated test equipment player specialising in machinery and systems used for testing semiconductor devices and electronic components. It is now ramping up its manufacturing segment with expansion up north in the Batu Kawan Industrial Park in Penang.

PublicInvest Research initiated coverage on QES in May this year with an “outperform” recommendation and a target price of 86 sen based on 26 times FY2025 earnings. The price-earnings ratio (PER) is at a 10% discount to the industry average of 29 times due to QES’ lower earnings base, small manufacturing earnings and higher risk due to the low entry barrier for its distribution division. However, the research house thinks the distribution business, which is recession-proof and has low investment requirements, would provide QES with recurring cash flow as it grows its manufacturing division.

In the case of Hibiscus Petroleum — whose share price is highly correlated with global crude oil prices, the recent acquisition of TotalEnergies EP (Brunei) BV for US$259.4 million cash is seen as a much-needed boost to its operations.

Total Energies EP (Brunei) has a 37.5% interest in Block B Maharajalela Jamalulalam (MLJ Field), with the remaining shareholding held by Sheel Deepwater Borneo Ltd (35%) Brunei Energy Exploration SB (27.5%).  As at Jan 1, 2023, the field had proven and probable reserves of 24.2 million barrels equivalent (MMboe), of which 85% is gas and 15% condensate. According to PublicInvest, this acquisition will increase Hibiscus’ gas reserve portfolio by 166%, from 11.0MMboe to 29.3MMboe. 

Trading at a 12-month forward PER of only 3.6 times, Hong Leong Investment Bank Research says its current price implies a PER of 5.0 times on FY2024 earnings, which is deemed undervalued given its successful track record in extracting tremendous values from past acquisitions and its strong execution capabilities as a pure-play upstream exploration and production player.

Dutch Lady has been added to the list this time around as the dairy company ramps up production following the completion of its halal IR4.0 manufacturing facility DLMI@Enstek in Bandar Enstek, Negeri Sembilan. The added capacity should translate into higher revenue.

Dutch Lady’s RM540 million investment in the manufacturing facility with export capacity was funded internally, and the completion of the new plant could lead to a higher dividend payout for its shareholders in the near future. In the last three financial years, the company has paid out RM32 million in net dividends, translating into dividend payout ratios of 12.9%, 69.11% and 44.2% for FY2021 to FY2023 respectively.

In 1QFY2024, it reported a net profit of RM26.66 million. Annualised, this amounts to RM107 million. However, downside risks include higher accelerated depreciation from its Petaling Jaya plant and one-off costs related to the move to Bandar Enstek, fluctuating foreign exchange rates, variable commodity prices and potential shifts in regulatory frameworks.

Among the top picks of fund managers and heads of research, Gamuda Bhd (KL:GAMUDA) has the lead with a 44.9% jump in share price since the beginning of the year. It is followed by TT Vision Holdings Bhd (KL:TTVHB) (29.3%) and Telekom Malaysia Bhd (KL:TM) (22.2%).

TM is further expanding its data centre segment, having recently announced a partnership with Singapore Telecommunications Ltd (Singtel) to establish greenfield data centre facilities in Iskandar Puteri, Johor. TT Vision, a Penang-based automated test equipment maker, is favoured by analysts for its exposure to the fast-growing solar industry.

Loui Low, head of research at Malacca Securities, is maintaining TM as his top pick for 2H while recommending Dufu Technology Corp Bhd (KL:DUFU), which is poised to benefit from rising demand for hard disk drives from data centres.

MIDF Research head of research Imran Yassin Md Yusof recommends Gamuda as his new top pick for 2H with a target price of RM7.50, after his 1H pick Samaiden Group Bhd (KL:SAMAIDEN) has yielded a 13% gain YTD.

“Gamuda remains our top pick for the construction sector, backed by its successful overseas expansion plan; its consistency in clinching sizeable jobs and it being a front runner for most mega projects in Malaysia. We also like its exposure in the data centre construction space, now making its name as a premium builder.”

Imran notes that Gamuda’s bulging order book of RM24.2 billion provides strong earnings visibility for the next few financial years and it is expected to grow larger with more potential wins.

“The improving prospects of its property development business, especially from its exposure in Vietnam where demand currently outstrips supply, places it in a favourable position,” he adds.

Nonetheless, Alex Goh, head of research at AmInvestment Bank changed his top pick from Gamuda to Inari Amertron Bhd (KL:INARI) on the back of improving sector sentiment in tandem with rising demand for AI-related products as well as foreign direct investment in the country. In the past month, Inari’s share price rose as much as 22% to a recent high of RM3.89 — following a 28.5% year-on-year expansion in its January-March 2024 net profit to RM73.72 million — before paring gains to close at RM3.67 last Thursday.

David Loh, deputy head of equity at AHAM Capital, is switching out of Genting Malaysia Bhd (KL:GENM) to Mah Sing Group Bhd (KL:MAHSING).

“Despite the recent strong run in its share price, we continue to favour Mah Sing’s prospects over the long term. Driven by a highly entrepreneurial management team, Mah Sing’s recent foray into the data centre sector appears timely and well thought out. Rising demand for data consumption, coupled with a global AI boom, has resulted in a huge influx of data centre investments in Malaysia.

“Mah Sing is well positioned to capitalise on this as its 150-acre Bangi data centre hub is infra-ready, thus giving it a significant edge in terms of project lead time. Upon the full take-up of the entire data centre hub, this new business pillar could potentially propel its earnings by between 50% and 100% in the long term,” says Loh.

Editor’s note: This is an academic exercise.  No shares were purchased or sold. 

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