Eddy said: Commodity related companies are worth to keep an eye on, particularly O&G and steel stuffs.
Written by Joy Lee
KUALA LUMPUR: Small capitalised companies are safe havens in the midst of a volatile market as most are not over-exposed to the impact of the economy and have shown steady earnings and dividend yields, OSK Investment Research said.
Its deputy head of research Jeffrey Tan said interest had returned for the second and third liners in the past two weeks. The market was expected to make a stronger comeback towards the tail-end of results reporting season next month and that "it is a good time to reposition for the small cap stocks".
Small capitalised companies attracted less foreign investment and therefore less affected by the economic crisis compared with big cap companies, he said at the launch of OSK Top Malaysian Small Cap 50 Jewels book yesterday.
“These companies show steady earnings performance. They are safe haven stocks and some have paid good dividend yields of over 5%. In terms of capital preservation, they have been de-rated by the market but they are still paying the same dividends. They have big growth potential and would be in a position of strength when recovery comes,” he said.
Its top five stock pick were KPJ Healthcare Bhd, Kossan Rubber Industries Bhd, QL Resources Bhd, Wah Seong Corporation Bhd and Hektar REIT.
Although liquidity was an issue with small cap companies, Tan said it will improve when market recovers.
“Liquidity in small caps when compared to the big caps remains an issue. However, a lot of these companies are doing what is necessary such as undertaking corporate exercises to improve their liquidity profiles,” he said.
Associate director Chris Eng added the oil and gas (O&G), construction, media and consumer food sectors would see net profit growth this year.
“The rest of the sectors will likely record profit contraction. Some sectors which we are overweight on like gaming and utilities would still see profit but those sectors are expected to record profit contraction. It will be a tough year for them in 2009 and they will recover in 2010,” Eng said.
He said blue chips would soon be overvalued even if the market continues its upward trend. “Then people will start looking into the second and third liners,” he said.
In terms of sector outlook, OSK said the luxury condos downcycle would likely to bottom-out only in 2010.
“A 30% to 40% decline from last year’s peak is perhaps a reasonable expectation. Already, asking prices for some of these properties has declined by an average of 15%-20%. There would be a mild rebound in 2011 but this will be short-lived as the market will again be forced to digest the deluge of incoming supply towards the later part of that year,” it said.
Having said that, homebuyers of landed properties, especially in the mid-to-high end segment, are expected to return towards the later part of this year. The downside risk for this segment also appears limited and, if there is any at all, would not be as widespread as that for luxury condos amid a sharp downturn in the overall real sector. Most of the homebuyers in this segment are cash-rich and not highly leveraged.
“Given the fact that most also largely stayed away from the more volatile asset classes (vis-à-vis 10 years ago), most would have also been spared from the massive wealth destruction experienced in the equity market over the past one year. Given the accommodative interest rates, any “forced-selling” or foreclosures of properties like the one we saw during the 1997/98 Asian Financial Crisis will also be limited in this downcycle as well,” OSK said.
On the O&G sector, OSK said oil price will likely be in the range of US$60 and US$70 by year end. Light crude oil was trading around US$52 on April 10.
“Although there has been a lot of re-tendering of projects and slow replenishment of orderbooks, most O&G companies are fundamentally strong and have strong orderbooks to last for about a year and some have recurring revenue,” it said.
