Small, ambitious and aggressive

PETALING JAYA: The greatest upside for stocks that investors should buy for a three- to five-year horizon are from companies that are smaller in size, have ambitious and aggressive management as well as those that trade at attractive valuations.
CIMB Research said the top five stocks with greatest long-term price upside are Only World Group Holdings Bhd (OWG), MyEG Services Bhd, GHL Systems Bhd, Hovid Bhd and RHB Capital Bhd (RHBCap).
It said short-term share price movements are a function of the direction of sector and broader market trends, quarterly earnings performance, corporate news flow and analyst recommendations and coverage.
“We believe the long-term share price is determined more by fundamentals of the stock such as management capability, financial strength, relative valuations and earnings prospects,” it said in a report yesterday.
Based on the bottom-up approach, CIMB Research said naturally it is smaller caps that should enjoy stronger earnings per share growth and therefore higher long-term price upside. Also, it believes those with aggressive and ambitious management that trade on attractive valuations have the potential to provide the highest returns.
“For larger caps, the top three stocks with the highest potential share price upsides are RHBCap, Hartalega Holdings Bhd and Gamuda Bhd. For smaller caps, they are OWG, MyEG and GHL Systems.”
All in, the research house rated 18 sectors and many of the companies which top their sectors in the exercise coincide with CIMB’s top sector picks.
However, it said the second-placed company scored closely behind the top-placed company. These include Malayan Banking Bhd in the banking sector, Mah Sing Group Bhd in the property sector, Cypark Resources Bhd in the utilities sector, Inari Amertron Bhd in the technology sector band and Berjaya Food Bhd in the consumer sector.
“That means our top companies based on the four criteria in banks (RHBCap), property (Eco World Development Group Bhd), utilities (Tenaga Nasional Bhd), technology (GHL Systems) and consumer (QL Resources Bhd) have strong competition and that the second placed companies could also be worth investing in for the long term,” CIMB Research said.
Taking an optimistic view about the country’s longer-term macro outlook and also a positive bias on the prospects for various sectors, CIMB believed that within the next five years, cyclical sectors such as properties, construction, technology should enjoy an upturn, while for more defensive sectors such as consumer, real estate investment trusts and utilities, the environment should remain stable.
“Hence, the upside to our long-term share price targets carry with it a key caveat that Malaysia does not suffer major external shocks and the various sectors we cover enjoy steady progress or at least a stable outlook.
“While this is an unlikely scenario, as there are always negative surprises, it is a simple way to derive a reasonably realistic target price so many years out. But what it means is that there could be downside to our targets should any unforeseen developments take place.”
The upside to share prices for the top stocks in each sector ranges from 40-50% to a few hundred per cent. Not surprisingly, stocks from the larger and more mature sectors suffer lower growth prospects and therefore will likely offer investors lower upside too.
“RHBCap is perhaps the only exception, as despite its large market cap and position within the mature and highly competitive banking sector, the group is trading on low valuations, and we are excited about long-term prospects. RHBCap is ranked fifth highest on our list in terms of upside to long-term target price. The other four stocks ahead of it are all smaller caps, and OWG is in pole position.”
It added that it included OWG under the “others” sector category as the company is a unique combination of captive food and beverage and a tourism play on Genting Highlands and Penang.
“If the company executes well, the upside to share price, according to our calculations, is massive over the next three to five years.”
The second-highest comes from MyEG under the small-cap sector category. Although the stock has appreciated many folds over the past three years, CIMB believes the company’s outlook remains bright , with several aces up its sleeve.
In third place is GHL Systems under the technology sector, as its new business model of acquiring merchants and sharing in the fees charged for credit card usage could potentially transform the company tremendously in the coming years.
Fourth place goes to drug maker Hovid, but this is on the assumption that clinical trials for its Tocovid Suprabio vitamin will enjoy some positive progress.