RHB: Buy small caps to ride on rebound

KUALA LUMPUR (May 14): RHB Investment Bank Bhd has called on investors to look into the small-cap equity space given that shares in small-cap companies have lagged behind in staging strong recovery rebounds from the March 18 dip, compared to their large-cap peers.

In the virtual launch ofRHB Small Cap Jewel 2020 Edition, RHB’s head of regional equity research Alexander Chia said given that large-cap companies have staged solid rebounds off their March lows, small- and mid-cap stocks offer better value in this stage of the market.

"The increasing trading nature of the market also means a strong gravitational pull towards high-beta small- and mid-cap stocks,” he said.

Chia added that the launch ofRHB Top 20 Malaysia Small Cap Companies Jewels 2020is well-timed as there is strong demand for alpha-rich small- and mid-cap stocks that are resilient and can survive the ongoing turmoil.

For this year, the biggest representations, nine companies or 45% of RHB’s top 20 picks, come from the technology, and industrial products and services sectors. The median price-earnings valuation of RHB’s small-cap picks is 12.6 times, while the median return on equity (ROE) of the companies stands at 11.7%.

Among the top picks, 13 companies, or 65% of the 20, have market caps of less than RM500 million. Mi Technovation Bhd, at RM1.7 billion, has the largest capitalisation, while Advancecon Holdings Bhd, at RM122 million, has the smallest.

The screening process took into consideration the companies’ spread and size, credibility of the management, industry fundamentals, earnings growth potential, industry track record and the level of corporate governance.

Some of the top picks include Kumpulan Powernet Bhd, Omesti Bhd, Solarvest Holdings Bhd, SCGM Bhd, Gabungan AQRS Bhd and Radiant Globaltech Bhd that have sent representatives to the launching event to share their corporate developments.

In the opening address, RHB Investment Bank chief executive officer (CEO) Robert Huray expressed hope that small- and mid-cap companies that are able to manoeuvre faster to capitalise on emerging opportunities may stand a chance to outperform their large-cap peers.

“In contrast to large caps, the small- and mid-cap space offered investors a remarkable 27% gain versus -4.4% for the FBM KLCI in 2019, although still off from its peak by a much wider margin, down 23% year to date.

“With the fate of many bigger companies tied to waning external demand, low commodity prices and dwindling capacity to spend locally, chances of finding winners in the new norm post Covid-19 will be higher for smaller and nimbler companies that can better capitalise on emerging opportunities,” Huray said.

Meanwhile, RHB Malaysia Small Cap Research head Lee Meng Horng pointed out that shares in small-cap companies tend to move in a larger magnitude compare to the broader market in both an uptrend and a downtrend.

Based on RHB’s base-case assumption that the Covid-19 pandemic is able to be contained in first half of 2020 (1H20) and the economy to stage a recovery in 2H20, Lee thinks this shall bode well for the small-cap equity space.