OSK sees falling demand for small-cap stocks

INTEREST in local small-cap stocks is expected to decline further as the Malaysian market cools off following the global economic slowdown, says OSK Research Sdn Bhd head.

"I foresee a deterioration of interest in small-cap companies over the immediate period because of the current market situation and the low volume," OSK's head of research Kenny Yee told Business Times in an interview.

Yee said investors would be more inclined to invest in big-cap companies due to their liquid nature.

The FTSE Bursa Malaysia Small-Cap Index, which comprises 270 companies, has dropped 27 per cent in the last six month to end at 9,087.72 points on July 15.

The index was dragged down by losses in shares of PECD Bhd, Equine Capital Bhd and Time Engineering Bhd, among others.

The decline was not isolated as the Kuala Lumpur Composite Index shed 378.11 points over the same period due to the local political climate and soaring commodity prices.

Yee, however, said small caps were a good selection for investors with a long-term strategy and seeking diversity.

Small-cap stocks are generally appealing due to their higher earnings growth.

"They remain attractive in terms of their valuation and provide variety in the market as an additional investment avenue for fund managers," he said.

He added that most small-cap companies have seen exponential growth in their earnings for 2006 and 2007.

"These companies can ride on their capital appreciation," he said.

Many were run efficiently, which might help these companies weather the era of high costs.

Annually, OSK Research selects 100 companies with a market capitalisation below RM1 billion as its top small-cap picks.

"The list of companies is produced in a book titled "Top Malaysian Small Cap Companies: 100 Jewels" for institutional investors.

"We review our 100 jewels at year-end; if the company's immediate prospect is less than positive, we may drop it. On average we maintain and replace companies at a 60:40 ratio," he said.

In the 2008 edition, some of OSK's top picks include Hiap Teck Venture Bhd, TRC Synergy Bhd, Petra Energy Bhd and Faber Group Bhd.

Yee said the initial threshold for small-cap companies was below RM500 million, but OSK raised the limit over the years as it became increasingly difficult to find quality picks as the market thrived.

The research house filters its selection by using a company's profit track record, price earnings ratio, return on equity, dividend payment among others.

In terms of share price performance, the 100 Jewels from the 2007 edition recorded a 43.4 per cent return as at October 2007 as opposed to the 26 per cent posted by their KLCI counterparts.

Yee added that recommending small-cap stocks to institutions helps mature these companies into big-cap companies eventually, such as KNM Group Bhd and Kencana Petroleum Bhd, while attracting foreign fund managers.