RHB sees value among small-cap stocks amid Covid-19 crisis

Singapore

AS investors face heightened uncertainty amid the pandemic, research house RHB sees opportunities in several of the smaller-cap counters listed on the Singapore Exchange (SGX).

These companies could emerge from the crisis relatively unscathed or outperform their peers, according to Jarick Seet, head of Singapore small and mid-caps at RHB Securities.

Mr Seet was addressing the media and clients on Thursday at a teleconference as RHB launched its annual small-cap picks book 20 Jewels.

This year, more than half of the counters identified are new companies that have never been featured by RHB previously.

Among the new entrants is Marco Polo Marine, which was highlighted as a potential turnaround story. The integrated marine logistics company may be on the verge of a return to profitability given its clean balance sheet after a debt restructuring exercise in 2018, according to RHB.

Mr Seet expects the firm will emerge stronger when the pandemic eases and oil prices pick up.

For investors seeking value, Mr Seet suggests Oxley Holdings as it is "trading at a huge discount to NAV (net asset value)". He expects FY2020 to be a "decent year" for Oxley with the closure of the sale of Chevron House, as well as a potential special dividend.

Meanwhile, companies in the technology manufacturing sector are expected to do well on the back of the recovery of the semiconductor industry. RHB's picks in this space include Avi-Tech Electronics, Frencken Group and UMS Holdings, all of which could see high growth and bumper profits in the years ahead.

The research house also favours CSE Global and Avi-Tech Electronics for the potential boost to earnings that could come from mergers and acquisitions.

These companies are aiming for acquisitions and will likely be able to acquire at good prices due to the pandemic, said Mr Seet.

Finally, investors who are on the hunt for yield could consider Keppel Pacific Oak US Reit and Fu Yu Corporation, he said.

Against the current economic climate, RHB's research team has placed more emphasis on whether a firm is able to thrive in the next couple of years. Another consideration is if the firm can withstand further challenges that may arise from the pandemic, such as a second wave of infections, said Mr Seet at the media interview session.

Stocks with weak balance sheets and those in more vulnerable sectors have hence been dropped in RHB's screening process. In previous years with more bullish environments, the research house had included growth stocks in its screens even if they had slightly weaker balance sheets.

"We avoid stocks that are facing a risk in terms of survival at this moment. Even in the Reit space we are not looking at retail Reits because they are likely to be impacted quite badly in the next few quarters," he said.

Investors should look out for companies with a sound balance sheet and evaluate their growth prospects over the next few years, Mr Seet added. This ensures that that any downturn in revenue will not impact the company too badly.

While investors may think of a downturn as a reason to stick to large cap stocks, Mr Seet said RHB's small-cap picks would tend to be more flexible. Larger caps, meanwhile, would face a different set of risks including having to cope with higher fixed operating costs during a downturn.