SINGAPORE (Dec 11): While investors may be caught up in the rally of heavyweight stocks in the property, technology and banking sectors, they should not ignore opportunities in the small-cap space. “Small-cap stocks are not researched that well and are not that well known publicly. But savvy investors will know that they [have] tremendous potential, in terms of offering alpha to investors’ portfolios. They often have a reasonably attractive track record and the potential to grow into big-cap companies,” says Arup Raha, group head of research at RHB Research Institute.
At the SGX-RHB “Undiscovered Gems” Corporate Day on Dec 6, RHB presented five small-cap stocks that it believes fit the bill. Among them are Indonesian water treatment company Moya Holdings Asia, local real estate brokerage APAC Realty and regional recruitment firm HRnetGroup. The other two companies, on which RHB has not yet initiated coverage, are manufacturer Jackspeed Corp and precision engineering and oil and gas (O&G) company GSS Energy. “We hope that these companies will graduate to mid-cap and, along the way, even large-cap companies,” Raha says.
Indeed, some of the five stocks highlighted by RHB have been showing very strong growth recently. For instance, Moya, which has three build, operate and transfer (BOT) projects under contract and development by its subsidiaries, acquired another Indonesian water company called Acuatico for US$92.87 million ($125.43 million) in June, becoming Indonesia’s largest water company. Jarick Seet, head of small- and mid-caps at RHB, says in a Nov 14 report the company has delivered strong results after the acquisition. For 3QFY2017 ended Sept 30, Moya reported a 137% y-o-y jump in earnings to $5.48 million on an 845% y-o-y surge in revenue to $45.8 million.
Irwan Dinata, managing director of Moya, believes his company has lots of potential to continue growing in Indonesia’s still underdeveloped water sector. “If you look at the price of piped water we are selling to the market, it’s IDR7 per litre. People selling water in jerry cans [price] it at IDR200 per litre, and bottled water at IDR2,000 per litre,” he says during his presentation at the RHB event. “If you look at price comparison, we are the cheapest and most efficient.” In the longer term, Moya plans to expand to other Southeast Asian markets, he adds.
Shares in Moya are up 58.5% year-to-date. They are currently trading at 23 times forecast earnings for FY2017. RHB has a “buy” call on the stock and a price target of 17 cents.
New kids on the block
APAC Realty and HRnetGroup, which only listed on the Singapore Exchange this year, are also showing growth potential. APAC Realty primarily engages in real estate brokerage services, via its wholly-owned subsidiary ERA Realty, the second-largest property agency in Singapore. It also provides franchise services and real estate agent training, and it does property valuation work.
Jack Chua, CEO and executive director of APAC Realty, says it is a “no-brainer” that the company will see strong growth in its brokerage business next year amid the increasingly active property market. But he also hopes to grow the franchise business as a bulwark against any eventual slowdown in the property market. “It’s time for me to cultivate more activity in that area in order to stabilise the company; perhaps in three years, the property market [may have] a downturn. We know that everything that goes up must come down, so we are prepared for that,” he says.
For 3QFY2017 ended Sept 30, APAC Realty reported a 30.3% y-o-y rise in revenue to $105.5 million and a 7.2% y-o-y increase in earnings to $5.5 million. While its top line was boosted by brokerage income from rental and resale properties, operating expenses were also higher. Personnel costs rose 38.7% y-o-y to $3.8 million, while marketing costs jumped 68.3% to $308,000, owing to more publicity efforts.
Vijay Natarajan, an analyst at RHB, says APAC Realty “offers the best proxy for investors looking to tap the surging residential volumes in Singapore”. He notes that ERA Realty held a 37.5% market share in 2016. Overall, APAC Realty has a net cash position of $48.1 million, which provides room for inorganic growth. RHB initiated coverage on APAC Realty on Nov 30, with a “buy” call and a $1.20 price target. APAC Realty was listed in September after an IPO at 66 cents per share. The stock is now trading at 27.3% above its IPO price and 12.8 times forecast earnings for FY2017.
Like APAC Realty, HRnetGroup has a substantial cash trove of $276.5 million and no debt. The company is making more headway in Indonesia. On Nov 9, it entered into a binding term sheet with Indonesian recruiter Rimbun Job Agency to establish a new brand, HRnet Rimbun, in Jakarta. The term sheet will be subject to entry into a definitive shareholders’ agreement.
The announcement comes amid positive results for 3QFY2017 ended Sept 30. HRnetGroup posted a 20.2% y-o-y rise in earnings to $10.7 million, while revenue increased 7% y-o-y to $97.5 million. Adeline Sim, executive director of HRnetGroup, says the company is seeing more demand for recruitment services in sectors such as digital marketing in China and digital banking. “Our growth rate is not pegged to the GDP of the region we operate in, but to the growth rate of the fastest-growing companies, because those are the ones with the cash and intent to acquire talent,” she says. “That is a great opportunity for us now.”
In a Nov 14 report, Seet maintained a “buy” call on HRnetGroup, with a target price of $1.14. He expects the company to complete the acquisition of Rimbun by 1QFY2018 and to make more acquisitions in 1H2018. “With a net cash hoard of $280 million, coupled with $15 million to $20 million of free cash flow a year and low capex requirements, we believe the company is well positioned to go on an acquisition spree,” he says. He adds that the company is keen to expand to other parts of the world and has already signed several non-disclosure agreements.
HRnetGroup was listed in June after an IPO at 90 cents a share. The stock is trading at 8.9% below its IPO price and 22.1 times forecast earnings for FY2017.
Digging deeper
Among RHB’s undiscovered gems are two companies that its own analysts have yet to begin fully covering. One of them is GSS Energy, which is venturing into onshore oil production in Indonesia. Last year, the company entered into an agreement with Indonesian oil player Pertamina to assist in producing petroleum at the Trembul Operation Area in Central Java for 15 years. GSS Energy has completed its first oil drilling operations in Trembul and is awaiting the results of technical evaluation, according to its CEO Sydney Yeung.
He says the current downturn in the O&G sector is a good time for a small player such as GSS Energy to expand. “If we were to enter the industry five years ago, the chances of our being able to win certain concessions would be lower; all the big boys would be getting their hands on them,” he points out. For now, however, the company’s earnings are being driven by its precision engineering segment. For 3QFY2017 ended Sept 30, GSS Energy reported a 44.7% y-o-y rise in earnings to $2.1 million on the back of a 26.2% y-o-y gain in revenue to $25.4 million, with turnover entirely contributed by the precision engineering arm. The strong showing was due to more orders from existing and new clients. The company has added capacity to its plants in Batam, Indonesia, and Changzhou, China, to meet the growing demand.
Seet tells The Edge Singapore that GSS Energy’s O&G venture could add “incremental value” to the company even as its precision engineering business continues to grow. He is optimistic that oil prices will recover, noting the agreement among oil producers last month to extend oil output cuts to end-2018 to clear the oversupply of crude oil. “For this year, O&G is not really a play; it’s all tech, property and banks. But next year, O&G may come back and the outlook may be slightly better,” he says.
GSS Energy is already planning to drill its second well and seems set to make significant progress, Seet adds. “By the first quarter of next year, they could have at least two to three oil wells. And then the profits will even be expanded because there will no longer be any cost dragging down the O&G gas side.” Shares in GSS Energy are up 77.7% this year. They are trading at 12.4 times historical earnings and 1.8 times their book value.
Seet is also optimistic about Jackspeed, a maker of custom-fitted leather trim for seats in cars and planes. Jackspeed fell into the red following the 2008 global financial crisis. The company returned to profitability in FY2012 ended February through a series of restructuring exercises that included expanding into the sale and leasing of vehicles. For 2QFY2018, the company saw earnings rise 60.7% y-o-y to $2.6 million, although revenue dropped 23.8% to $29.1 million. It also started paying dividends after a six-year hiatus. For FY2017, Jackspeed paid out a final dividend of one cent a share. For 1HFY2018, it has declared an interim dividend of 0.5 cents each. This translates into an attractive 12-month yield of 7.8%.
Yap Kian Peng, CEO and executive deputy chairman of Jackspeed, says the company’s turnaround is progressing well. “Today, we have achieved some of the things that were [on my list],” says Yap, who was appointed the company’s executive chairman in 2010. “One of these was to pay our staff what they should get, instead of what they were facing previously — pay cuts and no bonuses. Today, they are having better times.”
However, Jackspeed was placed on the SGX Watch-list in March 2016 for failing to meet the minimum trading price rule. To exit the watch-list, Jackspeed will need to maintain a volume-weighted average price of at least 20 cents and an average daily market capitalisation of at least $40 million for six months. Seet figures this will be achievable by 1H2018 as the company continues its recovery and investor interest grows.
Shares in Jackspeed are up 85.6% this year. The company is currently trading at 9.3 times historical earnings and 1.2 times its book value.
