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We remain NEUTRAL on small caps as they continued to disappoint in 3Q11. While there is no denying that their valuations are cheap, investors currently have a small appetite for risk. Perisai Petroleum remains our top small-cap pick.
The sector’s average CY12 P/E of 9x looks attractive, being at a 30% discount to the KLCI’s P/E. The small-cap sector usually trades at discounts of between 25% and 35% to the KLCI. But we think that the discount could widen if the flight to quality accelerates over the next few months.
Perisai remains our top small-cap pick. At 6.2x P/E, it is also the cheapest stock in our oil & gas coverage. In addition, it offers the most share price upside in the oil & gas sector.