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Wednesday, June 19, 2013

Small is in (ext.CIMB)

The 1Q13 quarterly results for small caps continued to improve from the bottom in 3Q12. The FBM Small Cap Index outperformed the KLCI this year, up 28% compared to the KLCI’s 4.8% gain. The strongest outperformance was obvious just after the May general elections.

Review of 1Q13 corporate results
In our small cap universe, quarterly results improved further in 1Q13 from the worst-ever showing in 3Q12 when none of the small caps we monitored beat expectations. In the 1Q13 results season, 23% (14% in 4Q12) of our small cap universe trumped expectations while 23% (30% in 4Q12) were below. Companies that performed above expectations in 1Q13 include Jobstreet, Muhibbah and Uchi. Those that performed below expectations were Asia File, Eksons and Tomypak. Asia File’s revenue depends on troubled Europe, while Eksons is experiencing higher log costs, weak plywood demand and prices. Tomypak faced higher raw material costs during the quarter.

Recommendation changes
In May, we upgraded Jobstreet and Wellcall from Neutral to Outperform and downgraded Eksons and Asia File from Neutral to Underperform due to poor earnings growth outlooks. During the month, we initiated coverage on ICT education stock Prestariang with an Outperform call. This stock offers strong long-term EPS growth and attractive dividend yields, paid quarterly. At the same time, we dropped coverage on Pelikan mainly due to the lack of institutional investor interest.

MyEG outperformed this year
MyEG, our top small pick, did very well in 2013, outperforming the market by a wide margin, especially in May. YTD, the stock is up more than 90%, with most of the gains coming just after the recent General Elections. The stock has re-rated from just 11-12x to 18x 1-year forward P/E in the past month.

Prestariang is our new top small cap pick
MyEG’s share price has so far done very well this year. However, in this quarter, we are switching our top small cap pick from MyEG to Prestariang, which offers potentially greater price upside in the medium term. In May, we initiated coverage on Prestariang, an education ICT company, with an Outperform recommendation. This company is the country’s largest provider of information communications technology training, certification and software licence management and distribution.

In 2012, the company set up the country’s first boutique university, the University Malaysia of Computer Science and Engineering (UniMy). UniMy will be devoted to providing specialised computer science and engineering education in the country.

We like the company’s defensive revenue, 60% of which is currently recurring. This percentage should rise with UniMy. We are projecting 16% three-year EPS CAGR for Prestariang, with growth coming from existing services and contributions from UniMy. The valuation is attractive at only 8.8x CY14 P/E vs. MyEG’s 18x P/E. Prestariang’s net dividend yield remains attractive at 5.6%, even after the strong price outperformance in the past month.

Summary of our Outperform ratings (Selective)
Cypark. Cypark is ASEAN's largest renewable energy developer with plans to bring online 60MW of generation capacity over the next two years. While the company's share price has rerated post elections, we believe the stock remains below value based on our DCF-based target price of RM2.82. We forecast a two-year core EPS CAGR of 29%, underpinned by a gradual increase in generation capacity. For FY13, we expect the 2H to be better as the bulk of the additional 15MW new capacity for the year will come on line then. Cypark is also a proxy for the booming economy of Myanmar where the company intends to partner local players and build biogas farms to help meet the country's thirst for electricity.

Muhibbah Engineering. Muhibbah's orderbook prospects have improved due to greater visibility of jobs. We expect oil & gas-related infrastructure jobs under the ETP and port expansion projects to act as catalysts from 2H13, with potentially RM200m-300m worth of new jobs in the medium term. The group has a fair chance of benefiting from Petronas's Rapid project in Greater Iskandar, and has prequalified for three packages. Its shipyard and cranes segments remain key beneficiaries of local and regional oil & gas ventures. MRT remains more of a longer-term story. We maintain our Outperform rating with RM1.83 target price, pegged to an unchanged 40% RNAV discount.

MyEG. The company is confident about signing the custom service tax monitoring system (CSTM) concession soon. MyEG holds a 40% stake in the consortium. If all goes as planned, the company plans to launch this project nationwide this year. Total project capex is RM100m. Conservatively, we have not assumed any earnings from the CSTM concession. We maintain our EPS forecasts and target price based on 18.7x CY14 P/E, a 20% premium over our target market P/E of 15.6x. MyEG’s premium valuation is supported by its above-market 26.5% three-year EPS CAGR. Higher revenue growth from new services and signing of the custom service tax monitoring concession are catalysts.

Perisai. We like Perisai because it is moving up the value chain by going into higher-margin segments, namely floating production, storage and offloading (FPSO) and drilling. Now armed with 10 assets, the company is set to add FPSO vessel Lewek Arunothai to its fleet soon. The vessel will be deployed at the Kamelia field of the North Malay Basin to execute a Hess contract, with first gas expected in late Jul. Meanwhile, Perisai is scheduled to take delivery of its first jack-up rig in Jul 2014 and the second one in 2Q15. The company has yet to secure contracts for the rigs. The stock remains an Outperform.

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