At RHB Group Research’s third instalment of the RHB Small Cap Corporate Access (SCCA), over 100 fund managers and analysts from across the Southeast Asia region explored new investment ideas in the small-cap space to gain insights from the 16 featured corporations from Indonesia, Malaysia, Singapore and Thailand.

According to analyst Lee Meng Horng, overall market sentiment has improved of late, thanks to renewed confidence in the global economy, strengthening emerging market (EM) currencies and the reopening of China  — which is expected to boost the growth prospects of certain small-cap companies.

Lee believes reasons to be “more optimistic” include the weakening of the US dollar (USD) and the brewing expectation of a peaking Fed Funds Rate in 2023 and the improved investor sentiment which could potentially spur fund flow into EM counters, where valuations for the rate-sensitive growth names have “bottomed-up”.

“As such, we see compelling opportunities in the small-cap space. Also, the divergence of the state of the economy in China post reopening versus the decelerating global economic growth could lend the support to global demand and benefit Asean players,” he adds.

The analyst says that most of the companies featured in SCCA 2023 agree on the potential challenges that were exacerbated by decreasing economic growth, high inflation and volatile exchange rates, the escalation of input costs and certain demand uncertainties.

However, the outlook this year is not all “doom and gloom”, Lee notes. “[The companies] still see growth opportunities with differentiated strategies, country and industry exposure, domestic-demand growth, relatively low bases and production capacity relocation exercises taking place,” he says.

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RHB featured corporates from various sectors including healthcare, industrial products, oil and gas, technology, consumer products, consumer discretionary, financial services, construction and REITs. “As there is no one size that fits all, we tried to present a wide range of investment ideas to suit the diverse needs of investors,” says the analyst.

Lee’s highlights from the SCCA 2023 includes Arwana Citramulia in Indonesia, a leading ceramic tile manufacturer in Indonesia that is slated to benefit from its aggressive expansion plan and new products that target the low-to-middle income group. “Potential margin expansion from a favourable product mix, close proximity to target markets, coupled with a strong balance sheet and superior return on equity (ROE) and healthy dividend yield are among the company’s key selling points,” he says.

He also sees strong earnings growth potential for Malaysia’s Wah Seong Corporation, led by a strengthening orderbook and tenders for its pipe coating, engineering and construction businesses. Its capabilities in the fabrication of equipment in renewable energy and modules could also help to fuel growth, says Lee.

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Meanwhile, the largest home furnishing player in Thailand, Index Living Mall, is set to benefit from a recovery in consumption and tourism activity, with a mid-single digit same-store sales growth (SSSG) and double-digit income growth target into 2023. The analyst believes the resumption of store expansions and potential margin expansion should fuel its growth along with favourable policies like shopping tax breaks.

In Singapore, Lee says Bumitama Agri recorded a strong outperformance for 9MFY2022, and is on track to post record-high results for FY2022, with stronger fresh fruit bunches (FFB) yield and higher average selling prices likely to continue into FY2023 — partially offsetting the higher input costs.

According to him, productivity is recovering significantly, with Bumitama’s 9MFY2022 FFB yield increasing 14% y-o-y to 16.6 tonnes/ha and the momentum expected to continue towards the end of the year. The company’s 9MFY22 average selling price also showed a strong increase of 47% y-o-y to IDR12,900 per kg, thanks to its spot selling strategy while sales volume only saw a 1% uptick y-o-y as a result of tightened export policies by the Indonesian government, which resulted in stocks flooding the domestic market.

However, severe weather conditions in 2022 compared to the previous years due to the La Nina phenomenon has hampered harvesting as well as maintenance activities. As a result, it is likely that inventory levels as at end-2022 are still high while fertiliser applications for the year were not fully completed.

According to him, Indonesia’s policies continue to be deciding factors for Bumitama, which sees the issue of tackling the domestic supply of cooking oil in the country as one of the Indonesian government’s main focuses.

The government has revised its Domestic Market Obligation (DMO) revised where an additional 150,000 tonnes of crude palm oil (CPO) per month will be allocated to be sold domestically, increasing the total allocation under the DMO by 50% to 450,000 tonnes of CPO per month.

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To facilitate this, Indonesia has tightened its DMO domestic-to-export ratio to 1:6 from 1:8. While the supply of cooking oil is no longer as tight as it was a year ago, Bumitama says that domestic prices seem to remain elevated, currently at IDR20,000 to IDR25,000 per kg — higher than bulk cooking oil prices which have a price ceiling of IDR9300 per kg.

Despite the expectation of lower earnings, Lee believes its below-peer valuation and potential yields of 13% and 8% in FY2022 and FY2023, based on a 40% payout, will serve as a “support” for Bumitama.

As at 12.17pm, shares in Bumitama were trading 1 cent or 1.61% up at 63 cents, with a dividend yield of 7.34%.

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