“By going defensive, we’ve identified two key sectors: construction and pawnbroking,” says Yeo. Both sectors are fairly immune to the impact of the trade tariffs.
On the construction front, Yeo likes the sector’s domestic focus, with demand expected to be underpinned by major public infrastructure projects such as Changi Airport’s Terminal 5, new MRT lines, as well as public housing development and upgrading works.
In addition, pawnbroking names are making a rare appearance in the list. While these stocks may not always be in the spotlight, they offer investors proximity to the rising gold prices. “Pawnbrokers are closely tied to gold prices, so they represent more of a defensive play,” Yeo shares.
See also: Trade policy turmoil raises recession risk, but long-term equity outlook holds up: Capital Group
Beyond these industries, Yeo has chosen stocks within the consumer, industrials, property, tech, healthcare, and oil and gas (O&G) sectors. The industrials sector, in particular, is a growth-focused play.
Meanwhile, in the immediate term, Yeo recommends investors avoid businesses that are highly exposed to the US, because of “uncertainties”.
New names
See also: EM credit resilient and ready: Muzinich & Co
This year’s report features over 60% new names, which is consistent with RHB’s practice of refreshing its list.
“We limit the number of repeated stock picks to 40%,” says Yeo. “This allows us to cover new stocks that haven’t been talked about or featured [in the last two years]. So this brings about a fresher perspective.”
RHB’s featured small-cap stocks have a market capitalisation of up to $1.5 billion.
Small-cap stocks, he adds, come with both upside potential and risk. “Generally, small cap stock prices tend to be lower. That means on an absolute affordability basis — not valuation but dollar per share basis — they are pretty affordable.
“If you have a stock that [is trading at] one [or] two cents, because of that low base, the percentage jump can be significant. That is a benefit and also a risk,” says Yeo. “So if a stock is [trading at] half a cent and it jumps to one cent, it’s [essentially] 100% higher. So you gain 100% for the day. But then if you go into a one-cent stock and it goes to half a cent, you lose 50%.”
Yet at the end of the day, it’s really about understanding the companies before buying into them.
“There’s a good number of people who invest without building an understanding of the companies and their businesses,” says Yeo. “The single most important factor to investing — not just for small-cap stocks, but for any stock — is to understand what they’re buying and what they’re investing in.”
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Consumer picks
The consumer sector, for instance, is one of those industries that is considerably more straightforward, and most retail investors should know what they’re looking out for.
“For a consumer brand name like Sheng Siong Group, everyone knows the group operates supermarkets and it’s a transparent business,” says Yeo, adding that it’s harder for the layman to understand more specialised industries such as industrials or shipbuilding unless they have working knowledge of these sectors.
“If you want to invest, you’ve got to learn about the stock. What are the drivers? What are the indicators surrounding the stock? This is very important,” he shares. “Once you understand the business and the indicators that drive the stock price, and once the indicators move or turn, you will be better positioned to make better, calculated decisions and you are better positioned to act ahead before the situation turns. You’ll be able to read the stock better.”
Yeo, who has been an analyst for over 10 years and with RHB for three of them, is known for his coverage of consumer stocks such as Sheng Siong, Delfi, Food Empire and the formerly-listed BreadTalk.
While the sector has not been the most exciting in terms of earnings growth, Yeo points out that the market has different stocks which appeal to different investors’ profiles.
Consumer stocks are generally easier to understand, with more easily accessible indicators that investors can look at to check whether they’re doing well or not. “For the retail sector stocks, all you need to do is just walk into your neighbourhood retail store and observe whether people are buying more or less. These are indicators that you can pick up [and] it’s very easy to understand.”
Yeo notes that many of these consumer stocks have strong balance sheets and strong cash flows. “These qualities appeal to different kinds of investors,” Yeo shares. “They might want a simple story. They may not need high growth, because that comes with higher risk as well. They might not be able to stomach that kind of risk, like if a stock is growing at 30%, 40% or 50%.”
ThaiBev’s spin-off IPO
While consumer stocks tend to have relatively steady businesses, this has not stopped these companies from undertaking various deals or restructuring exercises. For example, last year, the Sirivadhanabhakdi family streamlined their stakes in various listed entities including Thai Beverage(ThaiBev), which, besides its core regional beer business, has distinct operations in spirits and F&B.
Given how the company is seen to be undervalued by some analysts, there has been suggestions that ThaiBev can spin off parts of these businesses for a separate listing, presumably fetching better valuations separately instead of suffering from a discount as a group. Besides the growing F&B portion, the separate listing of ThaiBev’s beer business has been discussed for years but nothing concrete has happened thus far.
“We know that they were previously trying to come to the market and they didn’t go through with the whole process. One of the factors appears to be valuation, so it really depends on what valuation they can get, how much the market is willing to pay,” says Yeo, adding that the timing hinges on the narrowing of the valuation gap between the promoter’s and the investor’s expectations and when the group wants to do the spin-off.
While pricing is always flexible, looking for someone to meet your valuation is harder.
Usually, when such deals are happening, The Edge Singapore understands that companies will engage the banks, which will hold off on coverage due to a conflict of interest.
Based on Bloomberg data so far, coverage from some of these houses on ThaiBev has resumed. There have also been no further updates on the spin-off listing after Michael Chye, chief of ThaiBev’s beer product group, indicated on Oct 1, 2024, that Beer Co’s IPO could happen in the third quarter of 2025 if it decided on the share sale by December 2024.
Best and worst calls of 2024
When asked about his best and worst calls, Yeo refers to his performance last year. Centurion, which was largely a bottom-up pick, was his best call, with a 120% surge from last year, thanks to the market’s growing appreciation for its steadily growing workers’ and students’ accommodation businesses, plus the prospects of a spin-off listing of a REIT, likely later this year.
Other stocks that did well were nursing operator Econ Healthcare (Asia), offshore engineering firm Dyna-Mac Holdingsand F&B operator RE&S, which returned 81%, 73% and 36% respectively, due to privatisation offers from parties who see their hidden value.
Not all calls worked out, though. From 2024, Aztech Globalis Yeo’s worst call, with a negative return of 46%. For years, Aztech Global was doing fine, riding on a healthy volume of orders from its key customer Amazon, expanding capacity to better meet the potential growth and dishing out generous dividends. However, when Amazon reduced its orders, the concentration risk turned negative. Yeo conceded that the lower volume from Amazon was not something he expected, but he is still pretty happy with his performance as it is a net gain overall.
While Yeo feels investors’ track records can never be perfect, they should aim to get more right calls than wrong calls overall. It’s the same for understanding an industry: Even though investors may look out for indicators, unforeseen circumstances may happen. What matters is whether they were able to make an informed decision back at the time, he shares.
“At the end of the day, if we reap the rewards, we give ourselves a pat on the back. But if we lose right, then we just have to take it on the chin and own the decision.”
Privatisation picks
On the recent spate of privatisations, Yeo notes that companies that delist usually have low trading volumes, indicating a lack of investor interest.
Even if there is a healthy interest in the counter, if the market valuation is low and does not meet the owners’ expectations, they may find little incentive to remain listed, especially if they do not require funds from the capital market. “If you are a good stock with strong investor interest, you would want to stay listed because if your valuation goes up, you would rather not privatise, right?”
Yet, there will always be stocks flying under the radar, which is why RHB has its Jewels Edition, says Yeo. “Hopefully we are right [in our picks],” he says with a laugh.
That said, in today’s environment, the analyst notes that investors will just have to be “more adaptive”.
“There will always be challenges out there, including stock picks or anything in life. Some things are beyond your control, like [the tariffs are] really beyond our control… so we need to be adaptive, hence our top-down picks,” he shares.
Going back to his picks this year, Yeo notes that these are “fundamentally sound companies with a great probability of generating good returns for investors” that will hopefully grow to become mid-sized corporations or large-cap companies “in the not-too-distant future”.
Charts: RHB
