Written by Chong Jin Hun & Gan Yen Kuan
Tuesday, 10 March 2009 11:18
KUALA LUMPUR: Penny stocks abound in the market. This follows the massive selldown by investors concerned about the country’s economic fundamentals and political tension against the backdrop of a weaker global economic landscape.
What used to be high-flying counters are now trading at substantial discounts to their peaks in recent months. But face value alone does not tell the whole story, according to fund managers and analysts.
The bigger picture would include a stock’s liquidity and valuation, besides the company’s business model and the industry it operates in.
A battered stock market, they said, had opened doors for mergers and acquisitions, and substantial shareholders taking companies private, capitalising on cheaper and more attractive valuations of the firms’ securities.
Choong Kuat Hock, head of stock research and a partner at fund management firm Kumpulan Sentiasa Cemerlang Sdn Bhd (KSC), said there were a lot of penny stocks in the market but not all were worth investing in.
Criteria that should be considered when investing in a penny stock included its liquidity, and the nature of its business, Choong told The Edge Financial Daily last week.
TA Securities Holdings Bhd head of research Kaladher Govindan defines penny stocks as speculative counters trading at below RM1 a share. However, their valuations are not necessarily cheap.
Potential upside in share prices would depend on the stock’s valuation, business model and industry fundamentals, he said.
Kaladher offered a few examples of penny stocks with cheap valuations. They included KNM Group Bhd, Malaysian Resources Corporation Bhd (MRCB), Muhibbah Engineering (M) Bhd, Scomi Group Bhd and Zelan Bhd.
“These stocks are trading at cheap valuations,” he said.
These firms, whose shares have been sold down substantially, come under the 100-stock Kuala Lumpur Composite Index.
KNM and MRCB shares ended last year down 82.73% and 72.35%, respectively, while Muhibbah and Scomi declined 73.67% and 75.9% respectively. Zelan tumbled the most among KLCI stocks last year, by 83.85%.
So far this year, KNM and Muhibbah have lost another 9.9% and 28.28%, as of last Friday, while Scomi and Zelan have declined a further 7.46% and 36.36%, respectively. MRCB, however, has gained 15.6% so far this year.
EAssetManagement Sdn Bhd director Joe KF Wong, meanwhile, offered a global view, saying that in the US, penny stocks are defined as shares trading below US$5 apiece.
In Malaysia, he said privatisation or share buybacks were possible when the stocks were trading below their book values, but exhibiting growth potential.
“They (regulators) may not delist penny stocks but could demote Main Board stocks which are not doing well to the Mesdaq market,” said Wong.
Among penny stocks, KSC’s Choong recommended Efficient E-Solutions Bhd, Pantech Group Holdings Bhd, and RCE Capital Bhd.
While penny stocks often have low liquidity, his three picks have “moderate” liquidity.
Efficient, a business process outsourcing (BPO) services provider, is deemed stable due to ongoing demand from clients, according to Choong. Its BPO services include data and document processing, records management, and archival and retrieval of documents.
“Even though there is an economic slowdown, it is business as usual for Efficient because its clients, especially financial and insurance companies, still outsource the services to Efficient,” he noted. Efficient, which was listed on Jan 10, 2005 on the Mesdaq market, was transferred to the Main Board on Oct 10 last year.
Choong said Pantech, which supplies specialised steel pipes and accessories to the oil and gas (O&G) sector, could benefit from the ongoing exploration activities by O&G companies such as Petroliam Nasional Bhd (Petronas).
“Despite the economic slowdown, Petronas has said it would go ahead with exploration activities. This creates demand for the products supplied by Pantech,” he said, adding that Pantech’s main activity was trading, hence no huge capital expenditure was required.
As for RCE Capital, the company is a non-financial institution that provides personal loans mainly to civil servants. Choong said RCE was able to secure loan repayment from its borrowers as the instalments were deducted from their salaries. Hence, non-performing loan is not expected to be an issue for the lender.
However, instead of specifically going for penny stocks, OSK Research said there were valuable small-cap stocks worth considering.
The research house, which will launch a book on the 50 best small-cap stocks by end-March, recommended Kossan Rubber Industries Bhd, QL Resources Bhd and Hai-O Enterprise Bhd.
Not only were these stocks relatively more resilient, they were also more liquid, it said.
OSK Research said Kossan was defensive in nature as demand for gloves had continued through the economic downturn. It has a target price of RM4.48 for the counter, which closed at RM2.94 last Friday.
QL was picked for its impressive track record and good dividend payout since it was listed in 2000, OSK Research said. QL’s net profit for the nine months ended Dec 31, 2008 jumped 18% to RM70.5 million on a 11% increase in revenue to RM1.08 billion.
“Demand for its products has been resilient,” an analyst at OSK Research said. Its target price of RM3.32 for QL represents a 38% upside potential for the stock, which closed at RM2.40 last Friday.
The research house also liked Hai-O, given that demand was intact for the company’s Chinese herbal healthcare products.
“We have been continuously promoting this stock. They are zooming into the Malay customer segment now,” the analyst said. OSK Research ascribed a target price of RM4.16 for Hai-O, which closed at RM3.26 last Friday.
This article appeared in The Edge Financial Daily, March 10, 2009.