The Edge Best Analyst Call Awards 2012

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IN its eighth edition, The Edge's annual Best Call Awards received submissions from 14 research outfits for 2012. Some changes were made this year, the most notable being the doing away of sectorial boundaries, which allowed the recognition of more than one good call for a particular sector.

Each research house's head of research was also asked to do a pre-selection by submitting three best calls for his or her outfit (as opposed to three per sector), with an additional nomination for a discovery stock. In other words, all stock calls considered for this year's awards are already winners in the eyes of their research heads.

To be sure, there are limitations to each methodology. In the course of evaluating the submissions, we came across other good calls that were eliminated within their own house. However, the judges decided to consider only the submitted calls.

We also decided to make some allowances on dates, so long as most gains or losses following a change in recommendation took place in 2012.

A total of 14 winners or 25% of the submissions made the cut. Of these, six covered small stocks with less than RM1 billion in market capitalisation. Most of the rest are on bigger but seemingly unloved stocks prior to the hard work and sound analysis put in by some of the analysts recognised here.

Here are the winners of The Edge's best calls for 2012, in no particular order.

Maybank IB Research analyst Desmond Ch'ng Lye Hoe's call on BIMB Holdings Bhd

With Malaysia being a leader in Islamic banking, it was a surprise to find the country's third largest Islamic bank being undervalued just 1 years ago. But that was the case when Maybank Investment Bank (IB) Research's Desmond Ch'ng initiated coverage on BIMB Holdings Bhd on June 27, 2011.

At the time, BIMB was trading at RM1.97 on the open market, but Ch'ng thought the group should be worth at least RM2.40 apiece based on a sum-of-parts valuation that implied a 22% upside potential.

At RM2.40 apiece, Ch'ng said BIMB's commercial banking arm Bank Islam Malaysia Bhd would be valued at 1.5 times book while the Islamic insurance arm Syarikat Takaful Malaysia Bhd was valued at one time book. While BIMB lost its lustre and plunged into the red in 2005/2006, Ch'ng said value had emerged following restructuring efforts put in by its new management.

Since the "buy" call, BIMB has risen as much as 67% to reach RM3.29 on June 20, 2012.

Besides correctly calling a buy on BIMB, Ch'ng also rightly advised clients to take profit after a good run. When Ch'ng cut BIMB to "sell" on June 25 this year with a RM3 target price, BIMB had gained 58% for the year and was going for RM3.20 apiece.

Two months later, on Aug 17, Ch'ng upgraded BIMB to a "hold" with a RM3.10 target price. BIMB has traded at between RM2.89 and RM3.28 since the downgrade to "hold", within a 7% upside and downside from the RM3.08 it was at when the recommendation was changed.

At the time of writing, Ch'ng still has a "hold" call on BIMB but his target price has been raised to RM3.15 apiece. Ch'ng's recommendation is also ranked first among seven houses in terms of total returns by the Bloomberg Absolute Return Rank (BARR).

Affin Investment Research analyst Kevin Low's call on Globetronics Technology Bhd

In a year when technology stocks seemed pass?and stock prices of hard disk drive component makers tumbled, it is perhaps natural to think that not many analysts would bother with the likes of Globetronics Technology Bhd. And judging by the dearth in coverage, not many did.

Yet Affin Investment Research analyst Kevin Low saw reason to initiate coverage on March 6, 2012, with a RM1.50 target price. At the time, Globetronics was fetching 99 sen on the open market.

According to Low, Penang-based Globetronics was Malaysia's best proxy for the growing smartphone and tablet markets. Highlighting the company's net cash position, the average 87% dividend payout ratio in the past three years and 11% dividend yield, Low said "the stock has the right ingredients to be a privatisation candidate".

Whatever prompted Low to look at Globetronics, investors who followed his recommendation would have seen sizeable gains - despite the still missing privatisation move.

Globetronics reached as high as RM1.62 on Aug 14, 2012 - up 63.4% from the 99 sen it was at when coverage started barely six months earlier.

At RM1.38 apiece on Dec 14, the stock was still showing a 39.4% gain from initiation and was up 66.5% YTD. Market capitalisation stood at RM376 million.

At the time of writing, Low still has a "buy" call on Globetronics and has since Aug 13 this year raised his target price to RM2.02 apiece. If he proves to be correct, there is a 46% upside potential from the current level. For now, the recognition is for decent gains from a well-timed initiation.

Kenanga Research analyst Teo Joo Tse's call on Dutch Lady Milk Industries Bhd

For a well-known consumer name like Dutch Lady Milk Industries Bhd, it was surprising to find a lack of coverage on the stock by research analysts. After all, Dutch Lady's market capitalisation stood at nearly RM3 billion at its RM45.80 close on Dec 14.

One factor that might have led to the lack of coverage is that 73% of its stocks is held by its top two shareholders.

But Kenanga Research analyst Teo Joo Tse saw enough reason to initiate coverage on the manufacturer of sweetened condensed milk, milk powder and other dairy products on Oct 31, 2011, with an "outperform" rating and RM22.30 target price.

"Dutch Lady has been consistently distributing dividends with gross dividend yield of 4.2% to 5.1% per annum, except in 2008. Going forward, we are expecting 104.4 sen and 95.2 sen dividend for FY2011 and FY2012 respectively, which translate into a gross dividend yield of 5.1% to 4.7%," Teo wrote in the note. In 2012, Dutch Lady paid 260 sen in interim and special dividends, Bloomberg data showed.

From RM19.38 when coverage started on Oct 31, 2011, Dutch Lady's stock price has rocketed 154% to reach as high as RM49.23 on Oct 25 this year.

As at Dec 14, the stock was still at RM45.80 apiece, up 104% YTD.

The stellar performance beat even Teo's expectations. But at the time of writing, Bloomberg data showed Teo to be the only analyst with active coverage on Dutch Lady - something that deserves recognition in itself.

Her call has since been downgraded to "market perform" with a target price of RM45.50 apiece.

KAF Research analyst Annuar Rahman's call on UMW Holdings Bhd

It's tough for analysts to beat peers when it comes to coverage on large capitalised stocks that are well-tracked. But KAF Research analyst Annuar Rahman managed to emerge ahead of the pack in his coverage of UMW Holdings Bhd.

Bloomberg data showed Annuar having a "buy" call on UMW from at least Oct 1, 2011. From April 5, 2012, however, Annuar raised his target price on UMW from RM9.10 to RM10.80 apiece while retaining a "buy" rating. At the time, UMW fetched RM7.31 on the open market.

"At current price, we believe valuations are undemanding, while gross yields are attractive at over 7% annually for FY2012 to FY2014," he said April 5, telling clients UMW's underperformance was unjustified.

From there, UMW shares gained 64.7% over nine months to as high as RM12.04 on Dec 14 this year. The stock was up 68% YTD and had a market capitalisation of RM13.76 billion.

Annuar's recommendation is also ranked first among peers in terms of total returns by the BARR.

BIMB Research analysts Thong Pak Leng and Noorhayati Maamor's call on Nestlé (M) Bhd

No one has a crystal ball, but it would appear that the analysts at BIMB did by looking at how accurately timed their calls on Nestlé (M) Bhd were.

When analysts Thong Pak Leng and Noorhayati Maamor initiated coverage on Nestlé with a "buy" on May 9, 2012, Bloomberg data showed everyone else on the street were saying "sell" or were neutral, at best.

At the time, Nestlé shares were going for RM56 apiece but the BIMB analysts thought it should be worth at least RM60.20 each, using a dividend discount model. "Coupled with a dividend yield of 3.3% and share price upside of 7.5%, the stock could offer potential returns of 10.8%," the analysts wrote in the note.

As it turned out, Nestlé proved to be a good buy. In fact, the stock ran ahead of their expectations.

On Sept 3, when Nestlé fetched RM64.60 apiece, BIMB upgraded its target price to RM68.70 apiece. This was after Nestlé's first half earnings came in ahead of its estimates and the research house raised its forecast and began valuing the stock using 2013 earnings.

Nestlé again outperformed, reaching as high as RM69.68 on Oct 30 this year. That's not too far from the RM69.50 apiece Nestlé was at when the BIMB analysts downgraded the stock to "neutral", reiterating its RM68.70 target price.

Nestlé did fall to RM59 apiece in late-November this year but at the time of writing, Nestlé was still at RM63.98 - about 7.9% away from the RM69.50 it was at when its rating was downgraded. Indicative yield was still close to 3%, according to Bloomberg data.

Whether or not the BIMB analysts continue to be right, investors who followed their recommendation would have already enjoyed a good run this year - not too shabby for a niche research outfit.

Maybank IB Research analyst Liaw Thong Jung's call on MISC Bhd

Analysts are often reluctant to say "sell". But Maybank IB Research analyst Liaw Thong Jung had enough conviction to cut MISC Bhd to a "sell" on Aug 19, 2011, while his peers remained neutral.

He downgraded MISC after its earnings came in far below consensus. Expectations of a challenging operating environment for MISC over the next 21 months also prompted Liaw to cut MISC to a "sell" with a sharply lower target price of RM6.44 from RM8.10 apiece.

At the time of the downgrade, MISC was going for RM7.30 apiece on the open market.

To be sure, Liaw isn't the first to call a "sell". At least two other houses had a "sell" on MISC for about a year by then, Bloomberg data showed. But there were also several "hold" calls as MISC had already shed close to one-fifth of its value in the one year prior to Liaw's downgrade.

Following Liaw's mid-August 2011 downgrade, however, MISC tumbled as much as 46% over nine months to RM3.94 on May 16 this year.

On May 17, Liaw saw reason to upgrade MISC to "hold" with a RM4.80 target price, highlighting its progressive exit from the loss-making liner operations. MISC was also trading at only 0.8 times book value. It was then going for RM4.10 apiece on the open market. Since the upgrade to a neutral stance, MISC has slipped only a further 5.6% to RM3.87 on June 5, 2012, at its lowest.

At the time of writing, MISC was going for RM4.07 apiece, about 10.5% lower than Liaw's RM4.55 target price for the stock.

Liaw still has a "hold" call on MISC while some of his peers have begun upgrading the stock, which had tumbled some 55% over two years. Time will tell if he continues to be right. For now, his "sell" and "hold" calls have proven accurate.

CIMB Research analyst Datuk Lucius Chong's call on Oriental Holdings Bhd

Intrepid fund managers at the Employees Provident Fund Board and Aberdeen Malaysia had long seen value at Oriental Holdings Bhd, founded by the late "Mr Honda" Tan Sri Loh Boon Siew.

But thanks to CIMB Research's Datuk Lucius Chong, more investors got to know the hidden value of the conglomerate that's seeing earnings contribution shift from the Honda vehicle distribution business it was known for, to sexier cash cows like plantations, property development and hotels.

When he initiated coverage on Oriental on July 18 this year with a RM9.10 target price, the stock was going for RM6.89 apiece.

"Investors can take comfort in Oriental's relatively predictable earnings stream where 60% of profits come from plantations and investment income. This will increase further over the long term as the group expands its planted area and diversifies into healthcare," Chong said in the note. With the first hospital still under construction in Melaka and will take time to breakeven, Chong said the extended Loh family is not new to the healthcare business.

At the time of writing, Oriental was at a new all-time high of RM8.55 apiece (Dec 14), up 24% over five months since the rating initiation and some 60% YTD.

No other house had active coverage on Oriental, according to Bloomberg data.

In addition, Oriental officials told The Edge earlier this year that they were impressed with the work put in by CIMB in churning out an information and valuation note on the company. In valuing Oriental's growing plantations business, Chong had help from CIMB's in-house plantations analyst Ivy Ng.

Since Aug 2, 2012, Chong has raised his target price for Oriental from RM9.10 to RM10 apiece, taking into account the value of properties the group owns abroad in countries such as the UK. If he's right, there is another 17% upside potential to be had.

Kenanga Research analyst Teo Joo Tse's call on GW Plastics Holdings Bhd

When Kenanga Research analyst Teo Joo Tse initiated coverage on GW Plastics with a "buy" and 86 sen target price on Dec 12, 2011, the stock was trading at 64 sen on the open market.

On hindsight, we know that larger rival Scientex Bhd was willing to pay RM283 million for two of GW Plastics' packaging units - Great Wall Plastics Industries Bhd and GW Packaging Sdn Bhd. Scientex's announcement on Oct 3, 2012, sent GW Plastics' stock price soaring to as high as RM1.15 on Dec 11 this year.

At the time of writing (Dec 14), the stock still fetched RM1.14 apiece. That's up over 78% from the 64 sen the stock was at when coverage started a year before and 35% above the 85 sen apiece it was at on Sept 21, just a week before Scientex's announcement.

To be sure, GW Plastics' market capitalisation is small at only RM269 million, despite the price gains.

Whatever the reason for GW Plastics' stock price gain, Teo's 11-page initiation report would have at least caught the interest of investors looking for alternative dividend yield stocks to invest in.

In her initiation report, Teo highlighted GW Plastics' dividend policy of having a 40% payout. She calculated that the stock would provide a yield of 5.6% in FY2011 and 6.7% for FY2012.

And while at least one house started coverage on the stock earlier than Kenanga, Teo's entry price was lower.

Teo's was the only "buy" recommendation on the street at the point of initiation, according to Bloomberg data. She has since downgraded GW Plastics to "market perform" with a 92 sen target price, according to an Oct 4 note.

OSK Research analyst Kong Heng Siong's call on Prestariang Bhd

When OSK Research analyst Kong Heng Siong initiated coverage on Prestariang Bhd on Sept 29, 2011, its stock was at 50 sen apiece. This was 44% below its IPO price of 90 sen apiece and about two months after the company's debut on Bursa Malaysia on July 27, 2011.

Not only did Kong show investors an entry price that was substantially below its IPO price, the entry level was also close to Prestariang's all-time low price of 49 sen on Sept 15, 2011.

Kong was also the first in town to highlight the value that had emerged in Prestariang following the price decline. In his initiation note, Kong told investors Prestariang should be worth at least 92 sen apiece and would "rise and shine like a star".

Apart from Prestariang's order book of close to RM280 million and its position as the largest distributor of Microsoft licences in Malaysia, Kong highlighted its dividend yield of "at least 10% in the next two years".

Highlighting a 50% payout policy over three years, Kong said Prestariang had a robust balance sheet with minimal capex requirements.

He predicted a dividend of 6.1 sen per share for FY2011. The actual dividend was 10 sen per share. Up to mid-November this year, another five sen had been declared, already more than half the 7.7 sen Kong predicted for FY2012 when starting the coverage.

Prestariang rocketed about 172% in 10 months to as high as RM1.36 on July 17, 2012, but has since stayed largely range-bound. The stock was at RM1.15 on Dec 14, a distance from Kong's target price of RM2.15 following an upgrade on June 25, 2012. The upgrade from RM1.48 was on the receipt of a government invitation to set up the University of Computing in Malaysia, which could potentially result in a recurring income stream. Will Kong again be proved right?

CIMB Research analyst Foong Wai Mun's call on Carlsberg Brewery Malaysia Bhd

Investors who followed CIMB Research analyst Foong Wai Mun's advice when he upgraded Carlsberg Brewery Malaysia Bhd to "outperform" from "neutral" with a higher target price on Nov 16, 2011, would have had reason to propose a toast to celebrate gains.

At the time of the upgrade, Carlsberg was going for RM7.25 on the open market. From there, the stock rose 82% to as high as RM13.20 on Nov 1, 2012. The stock was still at RM12.82 at the time of writing, up 50% YTD to command a RM4 billion market capitalisation.

In upgrading Carlsberg, Foong highlighted the potential margin expansion that could happen as the brewer finalised plans to brew premium beers locally. Not only are margins for premium beers higher, beers brewed locally would also be exempted from import duty of RM5 per litre, he said.

According to Foong, Carlsberg's share price was also "well supported by its solid dividend yields of 5%", something that continues to be true, according to Bloomberg data at the time of writing.

To be sure, nine out of 11 analysts covering Carlsberg has a "buy" call currently, with target prices ranging between RM12.54 and RM14.73 apiece. Foong had a target price of RM14.50 and his recommendation was also ranked first in terms of total returns by the BARR.

But what makes Foong's call special is that the timing of his upgrade was earlier than most of his peers. His call was also better than similar calls submitted for consideration.

If he continues to be right, there is a 13.1% upside potential from the current levels (RM12.82 close on Dec 14) to its RM14.50 target price. And that's not counting the dividends Carlsberg has been dishing out.

UOB Kay Hian Research analysts Vincent Khoo and Moey Su-En's call on Multi-Purpose Holdings Bhd

There were at least two "buy" calls on Multi-Purpose Holdings Bhd (MPHB) when UOB Kay Hian Research's Vincent Khoo and Moey Su-En started coverage with a "buy" call on May 2 this year. However, their entry price of RM2.68 for MPHB was the lowest among calls submitted for consideration.

And compared with MPHB's 52-week high of RM3.89 on Aug 24, 2012, the stock appreciated 45% barely four months from initiation - decent by any measure.

In its May 2 note, the analysts said "there could be substantial upside" to their sum-of-the-parts derived target price of RM4.20, which implied only a modest 2013 earnings multiple of 17.9 times. This is given the likelihood of Petroliam Nasional Bhd's (Petronas) RM60 billion Rapid project taking off and elevating the market value of MPHB's 4,641 acre adjacent land.

They also believed that MPHB could increase its net dividend yield "with adequate monetisation of non-core assets" and elimination of debt covenants of its gaming arm Magnum Corp Sdn Bhd. "A successful monetisation exercise also creates room for capital repayment as MPHB will most likely be cash rich."

As at Dec 14, MPHB has eased from its recent peak to RM3.48 apiece, putting its market capitalisation at about RM5 billion. If the UOB Kay Hian analysts are right about MPHB's valuation, there is a 20.7% upside potential to its RM4.20 target price from current levels.

OSK Research analyst Danny Chan's call on OldTown Bhd

On hindsight, anyone who called a "buy" on OldTown Bhd when the stock was at its lowest of 89 sen on Oct 3, 2011, would've been a hero. OSK Research's analyst Danny Chan wasn't that hero.

However, when Chan started coverage on OldTown on Jan 4 this year, the stock was going for RM1.25 on the open market - at par with its IPO price of RM1.25 but close to six months from its uninspiring debut on July 13, 2011.

His coverage initiation was ahead of at least three other peers, apart from two houses that had issued IPO advisory notes, Bloomberg data showed.

OldTown should be worth at least RM1.55 apiece or 13 times FY2012 earnings, Chan said in his note on Jan 4, 2012, highlighting the coffee chain's "potent brew".

From there, OldTown surged as much as 83% over seven months to reach RM2.29 on Aug 9 this year.

Ideally, Chan's call on OldTown would have proved even more prescient had he downgraded the stock to a "hold".

At the time of writing, OldTown was going for RM2.01 apiece. In recent weeks, sentiment on the stock had been weighed down by the company's intention to place out 10% of its share base to raise funds.

Four out of five analysts still have a "buy" on OldTown, including Chan, Bloomberg data showed.

Chan's RM2.60 target price is also at the higher end of the target prices, which ranged from RM2.23 to RM2.65 apiece. If he continues to be right, then there is a 29% upside potential from current stock price levels of RM2.01 as at Dec 14.

The recognition of this call, however, was because Chan was ahead of the curve in spotting the uptrend in OldTown's price appreciation this year, while being spared from the post-IPO underperformance in the later part of 2011.

Best discovery

It appears that OSK Research analyst Danny Chan Tzu Zhung has a knack for discovering unpolished diamonds in the equity market. Investors who took his advice when Chan initiated coverage on Johore Tin Bhd and Syarikat Takaful Malaysia Bhd would have seen the fruits of their investments by now.

"I guess I was lucky too," he replies modestly regarding the two stocks crowned as best discoveries.

According to Chan, Johore Tin was his first assignment when he joined OSK's equity research team in May last year.

Johore Tin's market capitalisation has more than doubled to RM149.3 million since Chan initiated coverage on the tin maker in October last year. Back then, the tin company had a market capitalisation of RM54.6 million based on a share price of 78 sen. At the time, Chan believed the stock should be worth RM1.62 and placed a "buy" call on the counter.

Ironically, it was not Johore Tin's primary business of manufacturing tin products that caught Chan's attention; he saw value in its newly acquired dairy business. In August last year, the tin manufacturer diversified into the dairy business, manufacturing sweetened condensed milk and evaporated milk.

"The highlight was really the newly acquired dairy business. We saw the value there. More than 80% of Johore Tin's dairy products are exported. And out of that, 60% are exported to Africa," he says. Africa is a huge market for the company as the market in that region generally uses sweetened condensed milk as a substitute for milk.

Meanwhile, prospects for the tin manufacturing business looked less exciting, says Chan, as he saw larger rivals Kian Joo Can Factory Bhd and Can-One Bhd dwarfing Johore Tin in terms of output capacity.

"The tin can business is dependent on its clients' growth while the clients grow with gross domestic product. Hence, growth would appear to be a bit more muted now," he adds.

Johore Tin's dairy business, which is in its growth stage, has been a significant contributor to the company's profits. "We have been proved right about Johore Tin so far. In its latest financials, more than half [of its profits were] from sweetened condensed milk," says Chan.

For the cumulative nine months ended Sept 30, the company's net profit leaped to RM16.66 million, up 280% from the previous year at RM4.33 million. Revenue jumped 122% to RM180.43 million from RM81.39 million previously.

The dairy business raked in a profit of RM11.8 million, representing 66.5% of total company profit, against revenue of RM120.9 million.

"We are expecting a 30% growth [for the company] next year. This growth is from a pretty high base," Chan adds.

Johore Tin has performed within the expectations of the research house. Going forward, Chan has highlighted a number of catalysts for the company.

"In August, the company conducted a rights issue to raise funds to purchase land, new machinery, build a new warehouse and also to enhance its existing machinery. This is a catalyst in itself.

"With the new funds, the company can have a new warehouse. It will also upgrade its existing evaporated milk machinery, which can enhance earnings by 20%," says Chan.

His fair value for Johore Tin is now RM2.50, taking into account a larger base post the rights issue.

During his stint covering the insurance sector, Chan's search for a value stock capable of generating positive returns led him to Syarikat Takaful Malaysia.

A rarity among insurers, Syarikat Takaful Malaysia provides good dividend yields. In FY2011, dividend yields were at 5.4%, and Chan forecasted 3.8% yield for FY2012 and 4.2% for FY2013.

When OSK Research first initiated coverage on the company on March 30, it placed a fair value of RM4.42 on the stock. At that time, it was priced at RM3.12. Currently, the shares hover around RM5.40, marking a 73% increase.

Chan had since passed on the coverage of Syarikat Takaful Malaysia to a colleague who maintained a "buy" call and has an RM8 fair value since August 2012.

"The company has performed within expectations. It managed to hit a high of RM6.61 during the peak. But the share price has corrected since from profit- taking," says Chan.

Currently, Chan opines that the stock, which is trading at a price earnings ratio of eight times, is still below the industry average. "Keep in mind the risk based capital framework will be coming in soon, which could change things. But for the next one year, fundamentals are still intact."

Chan believes Syarikat Takaful Malaysia's future is looking quite positive as it has the right recipe for success. The driving force of growth has been apparent from its strong distribution channels in the area of bancassurance activities, he adds.

He says Syarikat Takaful Malaysia's 15% no claim rebate for all its general insurance products and selected family takaful products has also put the company at an advantage. The rebate allows policyholders a 15% refund on their premiums at the end of each year if the fund is profitable and if they did not make any claim during the year.

"In that sense, it is the first mover for no claim rebate. I don't think any other insurance companies have implemented this strategy yet. It is a way to get customers in," he remarks.

The company's nine months ended Sept 30 net profit has increased 55.6% y-o-y to RM68.82 million.

When asked on his current top stock picks, Chan - who now covers the oil and gas sector - replies, "Dialog Group Bhd, Dayang Enterprise Holdings Bhd and SapuraKencana Petroleum Bhd".

This story first appeared in The Edge weekly edition of Dec 24-31, 2012.

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