Small-Mid Caps - Key Lies In Niche Stock-Picking
- Since the implosion of Blumont and other related penny stocks back in Oct 2013, sentiment on the small-cap landscape has yet to fully recover. However, our commitment to this space has not wavered and we continue to find much value and mis-pricing in this space.
- Due to weak macroeconomic conditions, we believe that the main strategy for 2017 would still be niche stock-picking from the bottom up in this space.
- Our Top Picks for 2017 are Fu Yu, Singapore Medical Group, Global Invacom and Spackman Entertainment. We remain OVERWEIGHT on this sector.
Fu Yu – defensive and potential takeover spin.
- With 74% of its market cap made up of net cash, we like Fu Yu (FUYU SP, BUY, TP: SGD0.29) for its cash generation, high dividend yield of 8% and strong balance sheet.
- We think that it would be a very attractive acquisition target by its overseas and local peers, or even private equity funds – especially after the recent takeover of Innovalues by the Northstar private equity group.
- Fu Yu is actually performing well operationally, with gross margins improving to 16% from 14% a year ago.
- Going forward, we also expect the USD to appreciate, which would benefit the company as over 80% of its revenue is in USD, while 50% of costs are denominated in SGD, MYR and CNY.
Spackman Entertainment – an undervalued proxy to Korea’s movie industry.
- The group, probably in its best health since its IPO, is primed for a strong turnaround due to a few key near-term catalysts – a 27.2% stake in Spackman Media Group (SMG) likely worth around USD45m – which it could sell to raise cash for special dividends or share buybacks; its blockbuster movie Master; and the divestment of loss-making Opus Pictures, reducing total SG&A costs by 70%.
Global Invacom – bouncing strongly back into profitability.
- Global Invacom (RAD SP, BUY, SGD0.25) steered itself back into profitability, as expected, with a solid 3Q16 performance.
- Going forward, with the production approval already secured for volume supply to its largest customer – which commenced in 4Q16 – we expect volumes and margins to pick up subsequently, especially in 2017.
Singapore Medical Group (SMG) – consolidating Singapore’s specialist arena.
- With its recent acquisition of Astra Women’s Specialists Group, that could bump up NPAT by SGD4.6m pa over five years, we expect SMG to continue its acquisition spree while it consolidates the specialist medical private fields in Singapore. We expect acquisitions ahead to be made at prudent valuations, in existing fields or new areas.
- In addition, with its 20-30% organic growth rate, partially boosted by its synergies from its acquisitions earlier, we believe that SMG would likely continue its strong NPAT growth for the next 2-3 years.
Stock-picking is the key to success.
- Due to weak macroeconomic conditions, we believe that the main strategy for 2017 would still be in niche stock-picking from the bottom up, for this space.
- We remain OVERWEIGHT on this sector.