Small/Mid Cap Strategy and Stock Picks - the DBS Vickers ...
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Small/Mid Cap Strategy and Stock Picks - the DBS Vickers ... Small/Mid Cap Strategy and Stock Picks - the DBS Vickers ...

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Regional Small/Mid Cap Strategy Q2 2008 Country Assessment GROWTH AND VALUATIONS Our projections show stronger growth for the smallmid caps. For FY08, small-mid cap universe growth is driven by the construction sector, as the high orderbooks are translated into earnings. We also expect strong contributions from the plantation sector on higher CPO prices. However, we note the absolute net profit for the small-mid caps is at c.7% of our total universe net profit. Hence, the overall earnings growth for our total universe of 18% for 08 and 10% for 09 is still largely driven by the large caps. The small-mid caps underperformance during the quarter has widened the gap in PE multiple against the large caps. For our universe, small-mid caps are trading at 9x 08 earnings, representing a 34% discount to large cap multiples. For FY09, small-mid caps are trading at 8x earnings, which is a 40% discount to large cap multiples. Growth and Valuation -- Large Caps vs Small-Mid Caps Earnings growth (%) PE (x) 2008 2009 2008 2009 Banks 29.2 12.2 12.2 10.9 Consumer 46.6 35.7 24.9 18.4 Media (65.6) 26.7 58.7 46.3 Motor (403.6) 25.5 16.6 13.2 Oil & Gas 107.7 69.1 14.3 8.5 Conglomerates 24.3 14.9 17.6 15.3 Construction 76.1 22.2 14.2 11.7 Concessionaires 4.3 4.2 12.3 11.8 Gaming 13.0 4.7 14.1 13.5 Plantation 40.0 6.4 18.8 17.6 Power 0.7 (2.1) 9.2 9.4 Property 7.1 11.9 13.8 12.4 Telecommunication 16.3 10.8 14.4 13.0 Transport/ Logistics 8.2 8.0 10.4 9.7 Large cap 17.6 9.3 13.9 12.7 Consumer 15.8 12.0 7.5 6.7 Manufacturing/ Industrial 0.4 16.7 6.5 5.5 Motor 13.3 10.3 6.9 6.2 Oil & Gas 20.6 15.4 12.7 11.0 Construction 319.3 23.0 8.5 7.0 Concessionaire 12.6 11.0 17.4 15.6 Gaming 9.7 13.6 7.0 6.1 Plantation 49.7 8.6 8.3 7.6 Property 20.7 30.0 10.4 8.0 Telco 17.6 23.1 16.8 13.6 Technology 55.0 45.8 3.1 2.1 Transport 13.9 16.5 4.7 4.1 Small cap 23.2 20.1 9.2 7.6 DBS Vickers Universe 18.0 10.0 13.6 12.3 Source: DBS Vickers Page 36

Regional Small/Mid Cap Strategy Q2 2008 Country Assessment STRATEGY AND STOCK PICKS A. Review Review: 1Q08 Small-Mid Cap Picks 25 Mar 08 17 Dec 07 Change % (RM) (RM) Wah Seong 2.20 3.94 (44.2) TRC Synergy 1.75 2.20 (20.5) Source: DBS Vickers Following the surprise General Election results, construction stocks including TRC Synergy have taken a beating. The stock is off 21% since end last year on concerns that the Ninth Malaysia Plan projects would be delayed. We believe that overpenalises TRC, as it still has a healthy and outstanding orderbook of c.RM0.9b. Wah Seong’s share price corrected as it announced that it was not participating in the Nordstream project. In an announcement to Bursa Malaysia, Wah Seong said that the contract value awarded was below the level required to successfully undertake the project. We believe the selldown in Wah Seong’s share price was excessive. Fundamentals for the Group remain intact and Wah Seong remaining as one of the three largest oil & gas pipe coating players in the world. B. 2Q08 Recommendation 2Q08 Small-Mid Cap Picks Mkt Target Val/Day Cap Price Price Upside PE EV/EBITDA P/BV Div Yld ROE 6m Company FYE (RMm) (RM) (RM) (%) 09F 09F 09F 09F 09F (RM'000) Litrak Mar 1,762 3.58 4.30 20.1 15.7x 8.9x 1.8x 2.0% 11.7% 424 Alam Maritim Dec 898 1.85 3.20 73.0 9.8x 8.3x 2.5x 0.6% 28.5% 365 Source: DBS Vickers The underperformance of small-mid caps in 1Q08 has brought valuations to attractive levels. In particular, we like several themes including oil & gas and highyielding stocks. Oil & gas: We continue to like the oil & gas sector, as we foresee higher spending for the sector. We expect commencement of several projects in the region this year that should be positive for fabricators, process equipment manufacturers and pipe suppliers. We like Alam Maritim in the offshore marine segment. All its vessels are Malaysian-flagged, making Alam a beneficiary of Petronas’ preference for Malaysianflagged support vessels. The stock is now trading at attractive PEG multiple of 0.2x. Other oil & gas picks include Wah Seong and Petra Perdana. High yielding: At current Evergreen Fibreboard (5.8%) provide attractive yield. For Litrak, toll collection on the Damansara Puchong Highway is a steady business that generates strong cashflows. We foresee that this stock has the potential to significantly improve yields. We note that Sunrise, CBIP, Evergreen Fibreboard and TRC Synergy currently trade at PEG multiples of below 0.3x. Page 37

Regional <strong>Small</strong>/<strong>Mid</strong> <strong>Cap</strong> <strong>Strategy</strong> Q2 2008<br />

Country Assessment<br />

GROWTH AND VALUATIONS<br />

Our projections show stronger growth for <strong>the</strong> smallmid<br />

caps. For FY08, small-mid cap universe growth is<br />

driven by <strong>the</strong> construction sector, as <strong>the</strong> high<br />

orderbooks are translated into earnings. We also<br />

expect strong contributions from <strong>the</strong> plantation sector<br />

on higher CPO prices. However, we note <strong>the</strong> absolute<br />

net profit for <strong>the</strong> small-mid caps is at c.7% of our<br />

total universe net profit. Hence, <strong>the</strong> overall earnings<br />

growth for our total universe of 18% for 08 <strong>and</strong> 10%<br />

for 09 is still largely driven by <strong>the</strong> large caps.<br />

The small-mid caps underperformance during <strong>the</strong><br />

quarter has widened <strong>the</strong> gap in PE multiple against<br />

<strong>the</strong> large caps. For our universe, small-mid caps are<br />

trading at 9x 08 earnings, representing a 34%<br />

discount to large cap multiples. For FY09, small-mid<br />

caps are trading at 8x earnings, which is a 40%<br />

discount to large cap multiples.<br />

Growth <strong>and</strong> Valuation -- Large <strong>Cap</strong>s vs <strong>Small</strong>-<strong>Mid</strong> <strong>Cap</strong>s<br />

Earnings growth (%)<br />

PE (x)<br />

2008 2009 2008 2009<br />

Banks 29.2 12.2 12.2 10.9<br />

Consumer 46.6 35.7 24.9 18.4<br />

Media (65.6) 26.7 58.7 46.3<br />

Motor (403.6) 25.5 16.6 13.2<br />

Oil & Gas 107.7 69.1 14.3 8.5<br />

Conglomerates 24.3 14.9 17.6 15.3<br />

Construction 76.1 22.2 14.2 11.7<br />

Concessionaires 4.3 4.2 12.3 11.8<br />

Gaming 13.0 4.7 14.1 13.5<br />

Plantation 40.0 6.4 18.8 17.6<br />

Power 0.7 (2.1) 9.2 9.4<br />

Property 7.1 11.9 13.8 12.4<br />

Telecommunication 16.3 10.8 14.4 13.0<br />

Transport/ Logistics 8.2 8.0 10.4 9.7<br />

Large cap 17.6 9.3 13.9 12.7<br />

Consumer 15.8 12.0 7.5 6.7<br />

Manufacturing/ Industrial 0.4 16.7 6.5 5.5<br />

Motor 13.3 10.3 6.9 6.2<br />

Oil & Gas 20.6 15.4 12.7 11.0<br />

Construction 319.3 23.0 8.5 7.0<br />

Concessionaire 12.6 11.0 17.4 15.6<br />

Gaming 9.7 13.6 7.0 6.1<br />

Plantation 49.7 8.6 8.3 7.6<br />

Property 20.7 30.0 10.4 8.0<br />

Telco 17.6 23.1 16.8 13.6<br />

Technology 55.0 45.8 3.1 2.1<br />

Transport 13.9 16.5 4.7 4.1<br />

<strong>Small</strong> cap 23.2 20.1 9.2 7.6<br />

<strong>DBS</strong> <strong>Vickers</strong> Universe 18.0 10.0 13.6 12.3<br />

Source: <strong>DBS</strong> <strong>Vickers</strong><br />

Page 36

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