RHB Singapore Disclosed 20 Hidden Gems Within SGX-Listed Small-Cap Companies

Year 2018 is not a good year for small-mid capitalization (cap) stocks as many of them have declined over 50% over the course of the year. In addition, they tend to be overlooked by investors as blue-chip stocks and real-estate-investment-trusts (REITs) soak up all the limelight.

But investors should not write off these smaller stocks anytime soon because they are shown to outperform large cap stocks historically over the long term.

According to a study done by Schroders, the MSCI Global Small Cap Index has returned 317% (including dividends) compared with 107% for the MSCI Global Large Cap Index from 31 Mar 2001 to 12 Feb 2017.

RHB’s Launch of “20 Jewels 2019 Edition”

On that note, we are excited to hear that RHB Securities recently launched its 9th edition of Top Singapore Small Cap Companies book, featuring 20 undiscovered jewels that have the potential to thrive in coming years. Out of those, there are 13 new companies have never been highlighted before in previous editions.

RHB’s award winning equity research team has been meticulous in selecting the 20 companies. The team conducted interviews with senior management of the companies, undertook site visits as well as in-depth fact checks before formulating the investment thesis.

Below is the list of 20 companies with their financial metrics like Market Capitalization, P/E ratios, ROE (%) and more.

Looking at the list above, technology and manufacturing names such as Fu Yu Corporation, Memtech International and Riverstone Holdings make up a large part of the Top 20 Small Cap picks.

That said, there are also a wide range of stocks hailing from various sectors such as entertainment, property and REITs, finance, rubber, pharmaceutical as well as oil and gas sectors.

Despite the differences in their business models, market capitalisation and investor interest, the RHB research team believes that the list of stocks share a common DNA – they are fundamentally sound companies with a high probability of generating positive returns for investors.

With that in mind, we have taken out excerpts from 4 stocks across different industries to touch on some of their investment merits and risks below.

Taking a closer look at 4 Jewels

1. Delfi Group - Proxy To Indonesia’s Rising Middle Class

Profile

Listed on SGX in 2004, Delfi markets and distributes its own brand of chocolate confectionery products in Indonesia, the Philippines, Malaysia, and Singapore. Major brands include SilverQueen, Ceres, and Delfi amongst others. The company also distributes agency brands to help improve its overall portfolio offerings and operating leverage.

Investment Merits

  • Market leader in Indonesia’s chocolate confectionery sector
  • Premiumisation strategy capitalises on growing demand from a rising middle class
  • Expansion of Gross margins due to recovery of Indonesian Rupiah (IDR) and higher sales in premium goods

Risks

  • Lack of stock liquidity
  • IDR depreciation.

2. Hyphens Pharma - An Undervalued Pharmaceutical and Consumer Healthcare Group

Profile

Hyphens Pharma is one of Singapore’s leading specialty pharmaceutical and consumer healthcare groups, leveraging on its diverse footprint in ASEAN countries. The group has a direct presence in Singapore, Vietnam, Malaysia, Indonesia and the Philippines, and is supplemented by a marketing and distribution network covering six additional jurisdictions, namely, Hong Kong, Myanmar, Brunei, Cambodia, Oman and Bangladesh.

Investment Merits

  • Currently trading at 8.2x FY18 P/E, a significant discount to the industry average of c. 19x P/E.
  • Potential boost in revenue from launch of propriety brand - Ceradan® Advanced in 2QFY19
  • Clean balance sheet, positive operating cash flows and decent dividend payouts
  • Vietnam market continues to be its key growth driver for Specialty Pharma Principals segment in FY19

Risks

  • Unsuccessful product registration
  • Reliance on the relationships with brand principals
  • Foreign exchange fluctuation risk

3. EC World REIT - Proxy To China’s E-Commerce Growth

Profile

EC World REIT owns seven assets in China (Hangzhou: six, Wuhan: one) that mainly cater to the e-commerce, logistics and supply-chain segments. The assets are valued at SGD1.4bn, and have a total NLA of 0.75m sqm, with remaining land-lease tenures ranging between 35-47 years.

Investment Merits

  • Currently offers one of the highest FY18F-19F yields of 8.8% and 9.2% in S-REITs market
  • Proxy to growth in China’s e-commerce and logistics segments
  • Master leases with rent escalation only maturing in 4Q 2024 to provide income stability
  • Strong sponsor (Forchn Group) with 44% stake to support with pipeline assets

Risks

  • Unfavourable forex fluctuations
  • Unexpected slowdown in China’s GDP growth.

4. UG Healthcare - Driven By Rising Output

Profile

UGHC manufactures gloves according to demand from its own distribution companies located in Europe, the US, China, Africa and South America, where it markets and sells its own proprietary Unigloves brand of gloves. End users of UGHC’s proprietary Unigloves brand include healthcare providers such as hospitals, dental clinics, and nursing homes, as well as the manufacturing, life sciences, food & beverage, and beauty sectors.

Investment Merits

  • Higher capacity expansion and production efficiency to kick in after full commercialisation of 500 million pa glove capacity in Jan 2019; projected to raise capacity from 2.4 bn to 3.2 bn gloves
  • Onboard of a rising tide for increased demand of gloves globally
  • Extensive UGHC-owned downstream distribution infrastructure to spur demand and sales for proprietary Unigloves brand gloves
  • Low valuation at 6x FY20 P/E vs high teens for its peers

Risks

  • Higher gas and raw material prices, which could narrow margins.

Conclusion

To wrap up, RHB research team is confident that there is still value to be extracted from the fundamentally sound small cap stocks with high growth potential and decent dividend yields.

Hence, RHB has come out with this essential Small Cap investing handbook for investors to provide detailed analysis and recommendations for hidden gems within the small-cap space.

 

James Yeo

James Yeo is a Product Specialist of ShareInvestor, he oversees the development of ShareInvestor’s platforms, WebPro and Station. Being an avid growth investor since 2007, he has accumulated more than 10 years of experience with a decent track record and acquired a wealth of experience through his stint in renowned financial companies including Motley Fool Singapore and Yahoo Finance.

With his strong passion in investing, James aims to share his knowledge by providing essential research and analysis to empower both ShareInvestor’s valued subscribers and investors alike with quality financial literacy.

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