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Malaysia's most battered stocks look like bargains to top fund

Monday, February 22, 2016 - 07:39

[KUALA LUMPUR] After correctly predicting this year's slump in Malaysia's technology shares, Danny Wong Teck Meng is loading up on beaten-down energy stocks.

The chief executive officer of Areca Capital Sdn has been buying oil and gas companies in the past two months, betting that energy prices will rebound and valuations are pricing in too much pessimism.

"Oil and gas is one of my biggest bets now," said Mr Wong, who declined to name specific companies and whose Areca EquityTrust Fund has beaten 98 per cent of peers over the past three years with a 14 per cent return.

"Oil is more or less feeling the bottom. I can see daylight soon."

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Energy companies are among the worst decliners in the US$380 billion stock market over the past 12 months as crude plunged.

SapuraKencana Petroleum Bhd, the country's largest oil and gas services provider, and UMW Oil & Gas Corp, a unit of UMW Holdings Bhd, one of the nation's biggest conglomerates, have tumbled more than 30 per cent in the period to trade at less than the value of their net assets.

The Kuala Lumpur-based fund manager sold all his technology shares before December, saying the stocks were too expensive and a stronger ringgit would reduce the value of exporters' overseas earnings.

The Bursa Malaysia Technology Index has tumbled 10 per cent this year, after rallying 52 per cent in 2015, while the currency has climbed 2 per cent for the second-best performance in Southeast Asia.

Stock Valuations

SapuraKencana trades at 0.8 times price-to-book, compared with 1.7 times for the benchmark FTSE Bursa Malaysia KLCI Index.

UMW Oil & Gas is valued at 0.6, approaching a record low. The Bloomberg Oil & Gas Services Index has a multiple of 1.6.

Mr Wong's bets on energy shares may already be starting to pay off. Both SapuraKencana and Malaysia Marine & Heavy Engineering Holdings Bhd have rallied 16 per cent in the past month, while UMW Oil & Gas has gained 10 per cent.

Oil has risen above US$30 a barrel in New York as Iran cautiously supported a proposal by Saudi Arabia and Russia to freeze production at near-record levels. 

That's brightening the outlook for Malaysia, Asia's only major oil exporter, which derives about 22 per cent of state revenue from oil-related sources.

Resilient Growth

The nation's economy is also showing signs of resilience after growth slowed less than expected in the fourth quarter. Gross domestic product rose 4.5 per cent in the three months through December from a year earlier, compared with a 4.1 per cent median estimate in a Bloomberg News survey.

Mr Wong says energy companies are likely to report their "worst earnings" for the fourth and first quarter, before profits improve due to a low-base effect and higher crude prices.

"That would prompt markets to re-rate" the stocks, he said.

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