Last year’s 20 picks delivered a value weighted return of 159.9% and an equal-weighted return of 130.5%. The group’s picks outperformed the MSCI Singapore, which delivered only 26.8% returns, and the MSCI Small Cap Index, which returned a relatively meagre 43.0%.
“Some of these were not household names when we first featured them, and that is precisely the point,” says Jaiswal.
However, he adds that the team worked hard to identify names with sound fundamentals, relevant catalysts and improved investor visibility; the level of outperformance was also attributable to the “supportive” market conditions, including the Equity Market Development Programme (EQDP) introduced last February.
“We’re also realistic. Returns like these won’t happen every time,” he says.
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Even so, with “proper research, company engagement and patience”, Singapore’s small- and mid-cap space can still offer “meaningful investment ideas”. “This is the part of the market where diligent work still gets rewarded,” he says.
Returning for the 16th year
Now in its 16th year, the team has once again identified names that it thinks can do well.
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“Every stock in the book exhibits at least one fundamental characteristic, whether from its compelling valuation, interesting growth story, strong balance sheet, cash-generation capability or situational event-driven catalysts,” says Alfie Yeo, head of Singapore small-mid cap research, in his foreword. Each year, the team strives to introduce new names — 60% of the 20, or 12 — that have not been featured in the previous two editions.
Given the ongoing macroeconomic uncertainties and shifting investor sentiment, this year’s names were chosen for their resilient earnings, scalable business models or their ability to capitalise on long-term structural trends across sectors.
This year’s crop spans names from various sectors, including technology, industrial, construction, property, oil & gas, and healthcare. The team’s picks are anchored in three broad pillars: International and regional growth, the technology value chain, and domestic structural trends.
“Many of these companies are now exposed to markets in Australia, Vietnam, Malaysia, Thailand, the US and other regional markets,” says Jaiswal on the first pillar, at RHB’s inaugural closed-door Executive Circle event on May 15. The event brought together management teams from the 20 featured companies.
On the second pillar, the technology value chain, Jaiswal points to an “AI supercycle on capex,” with the share prices of some featured companies already up 300% last year and still rising this year. These companies include those in the semiconductor, AI, data centre and cloud-based software sectors.
Under the third pillar, domestic structural trends, the team has been “seeing a lot of improvement” over the past year and a half. Companies under this pillar include construction companies, industrial property developers, dormitory and co-living space operators and even a commercial vehicle leasing operator.
Other themes include exposure to the current elevated oil prices, the Certificate of Entitlement (COE) prices, robust property and construction sectors, and Singapore’s ageing population.
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“While the 20 companies in the book are quite different from one another in terms of business model, size, scale [and] sector, the common thread is that each one has at least one fundamental angle that we believe merits a fuller story,” Jaiswal notes.
There is also a wide range in terms of market cap for this year’s crop; the smallest company has a market capitalisation of less than $50 million, namely clinic chain Alliance Healthcare Group, while the largest is above $1 billion, as in the case of Centurion Corp. “This is again, deliberate. We don’t want to focus only on one bandwidth of small cap names,” says the analyst. “The mix, whether smaller or newer names, includes some of those which are not widely covered or talked about.”
Of the names, more than half are from the industrial and technology sectors, giving diversified exposure to multiple sub-sectors and international growth.
Specific calls include Civmec, which is positioned for potential order wins at Australia’s multi-billion dollar Henderson Defence Precinct project; CSE Global and Tai Sin Electric, which stand to benefit from the development of data centres in Singapore and the US; Dezign Format Group, which is pursuing regional expansion in the meetings, incentives, conferences and exhibitions (Mice) market across Malaysia and Thailand; HRnetGroup, which brings exposure to the high-GDP growth market of Vietnam and the scaling of its human resources software Octomate; and Skylink, which offers a commercial vehicle fleet expansion story, particularly in electric vehicles (EVs) amid rising Category C COE prices.
Riding tech trends
The team is “overweight” on the technology sector, given the growth trends in AI, data centres and semiconductors.
“Frencken and Micro-Mechanics are well exposed to the semiconductor value chain’s growth, while Toku and Info-Tech Systems Integrators offer investors the opportunity to invest in the expansion of their cloud-based and AI-driven customer-experience (CX) and human resource platforms, respectively,” says Yeo in his foreword. “Valuetronics is our earnings turnaround pick, as earnings recover towards pre-Covid-19 levels, backed by a strong net cash balance sheet.”
The remaining picks provide targeted exposure to property, construction, oil & gas and healthcare stocks at 15%, 15%, 10% and 5%, respectively.
Soon Hock Enterprise will benefit from the healthy demand for industrial property in Singapore. At the same time, Centurion Corp and Wee Hur look set to see upside from the strong demand for beds for foreign construction workers.
RHB’s oil & gas picks — Nam Cheong and Marco Polo Marine — will stand to gain from higher crude prices, while the bank’s sole healthcare name — Alliance Healthcare Group —“rides the long-term structural tailwind of Singapore’s ageing population.”
“The small-cap segment continues to offer compelling opportunities for investors willing to look beyond the traditional blue-chip universe,” says Yeo.
He adds that many of this year’s companies have established strong market positions and are already benefiting from the long-term themes above.
The ambition, he says, is that some of them will not be small-cap names for much longer — or not in the not-too-distant future, at least.
