SINGAPORE (Oct 7): KGI Securities has highlighted some small and mid-cap stocks that investors should consider adding to their portfolios.

Amid macroeconomic uncertainties that continue to plague the different industries, the brokerage believes these high dividend stocks on its watchlist could pay off handsomely.

According to KGI analyst Joel Ng, these small- and mid-cap companies offer attractive opportunities, but are more volatile compared to blue-chip companies. 

The brokerage has reiterated its stock picks for the small and mid-cap space, with the likes of Fu Yu Corp and Valuetronics emerging as favorites in the tech manufacturing sector, APAC Realty and Propnex in the real estate space, and CSE Global and China Aviation Oil (CAO) for the oil and gas (O&G) market. 

Tech companies, according to Ng, rank among the highest on the list with their exceptionally high dividend yields. Fu Yu tops KGI’s high dividend watchlist with a yield of 8.6%, while Valuetronics ranks third with a yield of 6.7%. 

Fu Yu saw its 1Q19 earnings more than double to $1.6 million from $0.5 million, with revenue inching up 0.7% on the back of higher sales in the consumer, medical and automotive & power tools segments. 

However, Valuetronics saw its earnings fall 3.1% to HK$48.1 million ($8.5 million) on the back of a 7.1% fall in revenue due to weaker consumer and business confidence under the uncertain macro-environment. 

While Fu Yu and Valuetronics have market capitalisations of $166 million and $183 million respectively, Ng notes that half of these figures comprise net cash accounts, which indicate that the companies are backed by “solid balance sheets”. 

In addition, 1Q19 has seen both companies have put in place efforts that will ensure a steady growth in the near future. Fu Yu will renew the lease for both its Singapore plants, and is planning on redeveloping and expanding the plant at 9 Tuas Drive to expand its operations. Meanwhile, Valuetronics’ leased facility in Vietnam has commenced shipments to the US. 

On the real estate front, the brokerage notes that both Propnex and APAC Realty offer attractive dividend yields of 7.3% and 5.2% respectively, in addition to “undemanding valuations” of 7-9x forwards price-to-earnings (PE). 

2Q19 was not an easy one for the real estate sector as the effects of recent economic uncertainties and property cooling measures kicked in. As a result, both Propnex and APAC Realty recorded declines in earnings on the back of lower revenues. The former, which is also Singapore’s largest real estate agency in terms of agents, posted an 11.9% drop in earnings, while the latter posted a 56.8% plunge in earnings.  

But Ng continues to remain bullish on the ability the two companies to weather the storms. For instance, Ng notes that 40% of Propnex’s market capitalisation of $183 million comprised of net cash. 

In its outlook statement for the most recent quarter, CEO of Propnex Ismail Gafoor said that the primary market was expected to remain resilient with strong sales momentum till the end of the year, driven by a strong pipeline of attractive new launches. 

In the O&G sector, operational diversification has placed CSE Global and CAO at the forefront. CSE reported a 3.9% increase in earnings for 2Q19 ended June. However, the group’s outstanding orderbook seems poised to pull it through potential headwinds, said RHB analyst Lee Cai Ling in a September report, noting that its outstanding orderbook stood at $188.1 million as at end-June – the highest in the six quarters. 

See: CSE Global expected to power through headwinds on strong orderbook

“CSE Global offers an attractive 6.0% dividend yield and is well diversified across its businesses in Singapore, Australia and the US,” says Ng. 

Similarly, Ng remains positive on CAO, terming it a “good opportunity to participate in the rapid growth of air travel in China and the region”. In addition, the long term prospects seem upbeat for the company. In the group’s 2Q19 outlook statement, CEO Wang Yanjun said that the company will continue to tap synergies created from its enhanced global supply and trading network. 

One company that the brokerage seems to favour is The Hour Glass – which might come as a surprise to some investors considering its low historical dividend yield of 3.8%. However, Ng believes that there is strong upside for its yield on the back of improving fundamentals and a strong balance sheet. 

For FY19, the group saw its full-year earnings climb 41% to $70.4 million for the FY19 ended March, from $49.8 million a year ago, while revenue grew 4% to $720.9 million from $691.6 million in FY18. This, according to the group, was largely due to positive consumer sentiment and steady growth across its regional network. 

“[The company] recently reported its highest annual profit in more than 20 years, trades at an attractive 8x historical P/E and is backed by net cash that makes up 30% of its market cap,” says Ng.