Malaysian Top Fund Says Small Stocks Cheap at 30% Discount

By Choong En Han  

Photographer: Charles Pertwee/Bloomberg

Lynn Cheah, chief executive officer of Eastspring Investments.

The manager of Malaysia’s top-performing equity fund says the nation’s small-cap stocks will extend a rally that sent the benchmark index up 20 percent this year because investors are underestimating growth prospects.
Eastspring Investments Bhd., whose small-cap fund has returned 53 percent during the past 12 months for the best gain among 205 peers, plans to boost holdings of small- and mid-cap companies, Chief Executive Officer Lynn Cheah said in an interview. The FTSE Bursa Malaysia Small Cap Index is valued at 11 times estimated earnings, a 30 percent discount versus the FTSE Bursa Malaysia KLCI Index of the largest stocks.
Profits at companies in the index will climb 35 percent in the next 12 months, compared with a 5.4 percent gain for the KLCI (FBMKLCI), analyst
estimates compiled by Bloomberg show. Smaller businesses including Inari Amertron Bhd. (INRI), the semiconductor packager that doubled earnings in the fourth quarter, are outperforming as money managers favor companies with the fastest growth, according to Cheah.
“We continue to see great value in a number of small- and mid-cap equities at the moment,” Cheah, who oversees about 25 billion ringgit ($7.9 billion) in Malaysia, said at her office in Kuala Lumpur on Sept. 1. “Some of these stocks are undiscovered gems.”

Top Holdings

The Eastspring Investments Small Cap Fund (PRUSCAP) invests in Malaysian companies with market values at or below 1 billion ringgit. Its top holdings include Inari Amertron and Berjaya Auto (BAUTO) Bhd., along with construction contractors Pintaras Jaya Bhd. and Pestech International Bhd., according to data compiled by Bloomberg.
Inari, whose main client is U.S.-based Avago Technologies Ltd. (AVGO), has jumped 92 percent this year. Inari said on Aug. 26 that its fourth-quarter profit surged 135 percent from a year earlier. Berjaya Auto, which sells cars for Mazda Motor Corp., has risen 72 percent this year. Its fourth-quarter net income doubled to 48.1 million ringgit.
The small-cap gauge rose 1 percent at the 5 p.m. close, the most in seven weeks, compared with a drop of less than 0.1 percent for the KLCI index.
“Smaller-cap companies are in a high-growth stage,” Cheah said. “The process of re-rating these stocks to their fair values will generate superior returns for investors. In contrast, big-cap companies operate in a mature stage.”

Felda Earnings

Even after Malaysia became the fastest-growing economy in Asia after China last quarter, profits fell at some of the Southeast Asian nation’s biggest companies. Genting Malaysia Bhd. (GENM), a casino operator, posted a 45 percent drop in second-quarter earnings, while Felda Global Ventures Holdings Bhd., an oil-palm planter, reported a 53 percent decline.
Genting has dropped 1.1 percent in Kuala Lumpur trading this year, while Felda has declined 14 percent. The KLCI index gained 0.1 percent.
CIMB Group Holdings Bhd., Malaysia’s second-largest bank, cut its year-end target for the KLCI to 1,950 from 2,030 in a Sept. 2 report after a “letdown” in the latest earnings results.
While small-cap stocks are still less expensive than their larger counterparts, valuations are increasing. The small-cap index’s forward price-to-earnings ratio is 11 percent higher than it was a year ago, according to data compiled by Bloomberg.
Cheah says she still sees buying opportunities and her firm is attracting more clients who want to invest in smaller companies. Eastspring is seeking to double its asset-management business in three years, she said.
“Stock selection is key to outperformance for the rest of the year,” Cheah said.