Four rough diamonds for investors looking for hidden value

RHB Research has ‘mined for and unearthed more diamonds in the rough for 2023’ 


INVESTORS are always on the lookout for stocks that are trading well below their intrinsic value. In other words, they are searching for rough diamonds. 

In an annual report, a local research house has come up with its own list of what it considers to be “diamonds in the rough”, with an environmental, social and governance (ESG) score above their country medians. 

In its latest edition, RHB Research Institute Sdn Bhd has “mined for and unearthed more diamonds in the rough for 2023”, listing the following four local counters: Press Metal Aluminium Holdings Bhd, Sunway Construction Group Bhd, Time dotCom Bhd and Samaiden Group Bhd. 

“Our methodology uses a fundamental bottom-up analysis, coupled with RHB Research’s on-the-ground insights. Our sector analysts provided their assessments of the average market multiples for the respective sectors that the companies operate in,” it said in the report entitled “ESG Diamonds in the Rough”. Eight regional stocks are also featured in its latest thematic report. 

“In parallel, the list was further refined based on our assessments of each company’s potential to grow margins without compromising on return on equity (ROE), while having a low gearing level. In an environment of potentially even higher interest rates, companies with a high debt/equity ratio would be penalised more. We also imputed inflation into our assessments, as we considered only companies that have grown their margins,” it added. 

The stocks are selected based on a number of criteria, including chalking ROE of 15% or above. The other yardstick deployed: 2023 net debt or shareholder funds of less than 0.7 times, a higher year-on-year (YoY) margin in 2023 versus 2022, trading below respective industry average multiples and having an ESG score above their country medians. 

RHB Research has, since mid-2021, assigned ESG scores, which it deems a major criterion, to all companies under its coverage. It monitors these scores and integrates them into its valuations. 

“We believe sustainable investment strategies will continue to deliver above-market returns,” it said. 

According to RHB Research, the list represents companies that its analysts believe can chart robust earnings growth, due to sector-or company-specific reasons. 

“We have ‘Buy’ recommendations on 11 of these counters, and our conviction is evidenced by their potentially strong upside returns. 

“This is a long-term strategy. As it takes time for coal to turn into diamonds, we believe that — in due course — all the companies in the list below should show healthy absolute returns,” stated RHB Research. 

Press Metal (Buy, Target Price: RM6.18)

Press Metal has an ESG score of 3.44, given that its carbon footprint ranks among the best in the global aluminium industry, with zero recorded workplace injuries and fatalities for two consecutive years, and a good level of transparency afforded by its reporting framework.

The research firm forecasts a commendable ROE of 36.6% for the financial year ending Dec 31, 2023 (FY23), and 29.9% for FY24, compared to 33.6% for FY22. 

“We are of the view that earnings growth will remain intact, backed by the growing and perpetual demand for aluminium,” it said. 

It noted that Press Metal’s PT Bintan Phase 2 is currently 84% complete, with the first 500,000 tonnes per annum portion of production now operational, and this has increased production volume progressively since. 

Adding that upon completion another one million tonnes will be added to Press Metal’s refining capacity. 

In view of the expected completion of PT Bintan Phase 2’s construction, RHB Research does not expect Press Metal’s borrowings to spike in 2023, and its net debt should be maintained close to 0.7 times. 

“We have yet to factor in its option to acquire a further 20% stake in Sunstone ( joint venture [JV] in China) — this may not pan out, as we gather that Press Metal is still in talks on finalising the deal,” it said. 

Meanwhile, the research firm expects Press Metal’s margins to improve, spurred by the reopening of China, the world’s largest consumer of aluminium. This should lift sentiment and support demand for aluminium which has slowed down in the past few months. 

It noted that Press Metal is trading at 20.7 times FY23 price-earnings ratio (PER), which is still well below its historical mean of 26 times, but is 45% above the global peer average of 14.2 times. 

Nevertheless, RHB Research believes Press Metal deserves a premium valuation, after factoring in its favourable cost structure, as well as the scarcity of hydro-powered smelters worldwide that have a solid ESG profile.

Press Metal ended last Friday’s trading at RM5.28. 

Samaiden (Buy, Targe Price: RM1.06)

RHB Research has pencilled Samaiden, a renewable energy (RE) turnkey engineering, procurement, construction and commissioning (EPCC) services provider, with an ESG score of 3.2, as it ensures compliance with environmental laws and regulations, has built a conducive work environment and adopts the majority of best practices of the Malaysian Code on Corporate Governance. 

RHB Research forecasts Samaiden to achieve an ROE of 19.9% for FY23, and 20.7% for FY24, versus 17.7% for FY22. 

“We believe the ROE expansion will be driven by the higher net margins coming from the declining photovoltaic (PV) module costs, as well as the group’s earnings growth. 

“This growth, in turn, comes from robust commercial and industrial EPCC jobs and upcoming corporate green power programme (CGPP) contracts,” it said. 

Samaiden, it noted, is also participating in the bid for the 600 megawatts (MW) quota for asset ownership which should further boost earnings. RHB Research said this is in line with Samaiden’s strategic plan to enlarge its clean energy portfolio to generate a diverse recurring income stream, for the purpose of balancing out seasonal EPCC projects. 

RHB Research said Samaiden has maintained a sound financial position since its listing, and as of Sept 30, 2022, its net cash stood at RM73.6 million. 

However, the research house is cognisant of its intent to expand its asset base which may increase debt levels in FY23-FY24 as the group may need to tap on debt financing for CGPP projects. 

It also expects Samaiden’s margins to improve, driven by the softening of PV module costs on the back of declining polysilicon prices, as well as the weakening of the US dollar to the ringgit. 

RHB Research noted that Samaiden is trading at a discount to its Malaysian utility peers at 13 times FY24 PER versus 14 times. 

“We believe the stock is trading at an undemanding valuation, given the group’s three-year 33.8% earnings CAGR, driven by its sturdy orderbook growth,” it added. 

Samaiden’s shares ended last Friday’s trading at 87 sen. 

Sunway Construction (Buy, Target Price: RM2.07) 

Sunway Construction is one of Malaysia’s largest construction companies. Apart from civil and infrastructure construction services, the company also provides more specialised services, including foundation and geotechnical engineering. It runs highly profitable precast concrete product manufacturing operations in Malaysia and Singapore. 

The company has an ESG score of 3.2 due to these factors: The RM8.8 million worth of solar panels at its Sunway Precast Industries in Senai, Johor, and Sunway Enterprise Park which help reduce carbon emissions; the various training and safety programmes introduced by the group to ensure the safety and health of its employees; and 62.5% of its board are independent members, with 25% of the board being made up by women. 

RHB Research forecasts a commendable ROE of 21.1% for FY23, versus 17.2% in FY21. 

It believes earnings growth in FY23 will be mainly driven by higher progress billings from ongoing projects (Light Rail Transit 3 and Johor Baru-Singapore Rapid Transit System Link) in addition to the newly won MYR1.7 billion data centre job in Sedenak Technology Park (STeP). 

Aside from that, it said that Sunway Construction precast segment has a sizeable outstanding orderbook of RM520 million (or 13% of total orderbook) as at the end of the third quarter of 2022 (3Q22), which should be buttressed by a robust pipeline of Singapore’s Housing and Development Board (HDB) flats in 2023 at 23,000 units versus 17,000 units in calendar year 2021 (CY21). 

With a net debt of 0.3 times in FY23, the research house does not expect the company to fork out any major capital expenditure over the next few years, and therefore could give ample room to gear up for more jobs in future. 

RHB Research expects Sunway Construction net profit margins to remain strong above 4.5% i.e., at 5% in FY23, attributable to the visible pipeline of projects from Sunway Bhd, Sunway Construction’s parent company, which is over 30% of its outstanding orderbook. This, it said, should further help in orderbook replenishment and earnings visibility. It also noted that total active tender book size is estimated to be above RM10 billion. 

RHB Research pointed out that currently Sunway Construction is trading below its historical average, namely at an undemanding 12.7 times FY23 PER, which is -1.5 standard deviation from the five-year mean of 15.5 times. 

Sunway Construction closed at RM1.63 last Friday. 

Time dotCom (Neutral. Target Price: RM5.30)

RHB Research has assigned an ESG score of 3.0 on Internet service provider Time dotCom due to its fibre optic cables requiring little maintenance with little emission risks, its key role in advancing the government’s affordable and quality broadband connectivity aspirations, and with 50% of its 10 board members being independent and four of them are women. 

The research house projects Time dotCom to post an ROE of 13.5% for FY22, and 16% for FY23, from 12% in FY21, supported by stronger earnings growth from continued expansion of its fibre footprint, higher utilisation of data centres and increased cloud offerings demand. 

It also noted that the group had a net cash balance of RM282 million as at the nine months ended Sept 30, 2022, with over RM2 billion in cash proceeds expected from the proposed sale of up to a 70% stake in AIMS Group to DigitalBridge Group Inc. 

With more special dividends in the offing following the sale of AIMS Group, RHB Research said Time dotCom has a regular dividend policy up to 50% of group normalised profit after tax, with actual payout ratios ranging 51%-104% over the past three years. 

It added that Time dotCom’s margins are expected to remain relatively steady, supported by good cost vigilance, operating efficiencies and some recovery in regional bandwidth sales. 

“The expansion of its fibre retail footprint would further enlarge its addressable market and drive margin enhancement,” it said. 

RHB Research remarked that Time dotCom’s stock valuation is supported by robust earnings execution and a solid track record. 

“The group posted a commendable core earnings compound annual growth rate (CAGR) of 14% for FY17-FY21, on the back of a corresponding revenue CAGR of 10.2%,” he added, noting that the valuation of the stock is in line with its domestic telecommunications peers at about 10 times Ebitda. 

Time dotCom stock ended last Friday’s trading at RM5.42. 

  • This article first appeared in The Malaysian Reserve weekly print edition