If you think that the stock market is overvalued, maybe you are not looking hard enough. In its most recent report, RHB dug into tons of companies in the ASEAN region with a bottom-up fundamental analysis to unravel diamonds in the rough.
RHB’s Screening Criteria
In screening for these stocks, RHB looked at four fundamental criteria: 1) Trading below the average market multiples; 2) Widening margins; 3) ROEs of 15 percent or above; 4) Reasonable corporate governance.
On top of that, RHB also used a credible screen by filtering out companies that do not have market cap above US$500 million. And based on RHB’s research, there are three interesting and undervalued stocks that the market has overlooked.
1. Heineken Malaysia
Heineken Malaysia (Heineken) is considered to be the leading producer of beer and stout in Malaysia. It produces and markets several alcohol brands, including: Tiger Beer, Guinness, Heineken, Anchor Smooth, Anchor Strong, Kirin Ichiban, Smirnoff Ice, Kilkenny, Anglia Shandy, Malta, Paulaner, and Strongbow.
Heineken’s market leader position
Heineken is one of the market leaders in Malaysia’s malt liquor market and RHB likes that status a lot. RHB used its reported domestic sales as a proxy of Heineken’s market share since there isn’t any public available data.
Heineken’s reported their domestic shares growth to be 61.4 percent over the last three to four years – this illustrates the company’s market-share gain momentum very well.
Good dividend yield for a growing brand
Heineken has a good track record of paying generous dividends to reward shareholders. The dividend payout ratio has been at least 90 percent over the last five years. This translates to dividend yields of four to five percent. As such, RHB sees Heineken as an appealing option for yield-seeking investors.
Heineken Malaysia (KLSE:HEIM) – BUY, Target Price RM19.50
Value for money
RHB compared AirAsia’s target P/E, P/BV and EV/EBITDAR multiples for 2017 earnings, book value and EBITDAR with its industry peers. Based on these valuation metrics, RHB opines that AirAsia is currently trading below peers’ valuations.
Divestment plans developed
AirAsia has plans to divest 60 to 70 percent of its stake in Asia Aviation Capital (AAC), its aircraft leasing subsidiary. RHB believes that this business monetisation exercise will support AirAsia’s earnings in 2017 when the transaction is completed by around 2Q2017.
AirAsia has also indicated that it may divest its stake in its pilot training academy – the Asian Aviation Centre of Excellence (AACE) – and investments in AirAsia Expedia.
The cash proceeds might be used to repay outstanding debts but RHB believes that a special dividend payout over 2017 and 2018 is more likely.
AirAsia (KLSE:AIRASIA) – BUY, Target Price RM3.70
3. Silverlake Axis
Big contract wins await
Silverlake is Asia’s leading software services and solutions provider. Silverlake is currently looking to offer and implement software solutions to a few Malaysian banks, with the purpose of replacing existing core banking systems.
The estimated contract value of these contracts range around MYR150-200 million for each bank and RHB believes that Silverlake is likely to secure a contract by the end of 2017.
Special dividend from sale of Global Infotech
Silverlake is expected to record a S$27.7-million gain and receive proceeds of about S$0.04 per share after fully disposing its intended allocation-for-sale shares in Global InfoTech (GIT).
This divestment exercise would take some time to complete and is expected to be done by 2HFY17. RHB believes that a sizeable amount of the proceeds from the sale will be returned to shareholders as special dividends.
New area of growth: insurance
Meanwhile, Silverlake is also focusing its growth efforts on its insurance arm. The management might engage in some merger and acquisition (M&A) activities in this space in the near term to grow its insurance segment.
Organically, Silverlake’s insurance arm is already growing at an impressive 20-30 percent per annum. This is not forgetting that the company has yet to expand across South-East Asia.
RHB foresees growth for Silverlake’s insurance segment to pick up steadily, supported by inorganic growth and through possible acquisitions of other private companies.
Silverlake (SGX:5CP) – BUY, Target Price $0.77