Among the small caps, CIMB Research uncovered four small cap gems that investors could add to their portfolio.
1. AEM Holdings Limited
As a contract manufacturer, AEM Holdings Limited is affected by its ability to become more cost efficient. CIMB Research believes that in 2H17, AEM could negotiate more lucrative terms with its suppliers for its raw materials.
AEM is also seeking the option of manufacturing in Penang where the cost is significantly lower. That could facilitate margin expansion for AEM in the next half.
CIMB Research foresees the possibility of a spike in share price if AEM can produce stronger quarterly results to showcase its quarter-on-quarter and year-on-year growth.
Regarding financials, AEM’s balance sheet is in a healthy net cash position. Nevertheless, AEM currently holds a dividend policy of distributing not less than 25 percent of profit after tax.
While AEM is not exactly a value play, CIMB Research sees a potential for its earnings growth to pick up in FY17F and FY18F. The earnings growth is expected to come from rising contribution from its key customer. AEM currently trades at 9x FY17F and 7.6x FY18F Price-Earnings ratio (PE).
CIMB Research: AEM Holdings Limited (SGX: AWX) – BUY, Target Price $3.39
2. Best World International Limited
Best World has been growing its earnings at an incredible pace over the past two years.
Since 2014, Best World has managed to record earnings per share (EPS) growth of more than 100 percent. In its latest quarter, Best World grew its net profit by 63 percent year-on-year.
CIMB Research foresees that Best World would be able to continue its pace of growth with a likelihood of even accelerating its growth as Best World converts its distribution in China to a direct selling model for its beauty products.
FY17 could turn out to be another year of record profitability backed by stronger sales in the Chinese market. Moreover, Best World has managed to increase product acceptance of its product in its Taiwan market. The sales growth momentum in Taiwan remains strong.
CIMB Research: Best World International Limited (SGX: CGN) – BUY, Target Price $1.52
3. Boustead Projects Limited
Boustead Projects is one of the top companies in the niche industrial property design & build space. Its position as the market leader in the sector, together with its medium-sized leasehold portfolio.
Boustead Projects is one of the top small cap gems of CIMB Research’s picks. Compared to the average Revalued Net Asset Valuation (RNAV) of industrial REITs in Singapore, Boustead trades at less than half REITs’ RNAV (1.05x versus 0.5x).
Moving forward, CIMB Research foresees inorganic growth (possible merger & acquisition) as a viable option for growth. CIMB Research believes that inorganic growth could help push Boustead Projects towards an eventual listing on the SGX as a REIT.
CIMB Research: Boustead Projects Limited (SGX: AVM) – BUY, Target Price $1.04
*(Not to be confused with Boustead Singapore Limited)
4. CSE Global Limited
In 1Q17, CSE Global managed to secure a large oil and gas (O&G) contract of $42 million, which drove the spike in revenue. As a result, 1Q17 contract intake leapt to a two-year high of $117.9 million, higher than the order intake of any of the past eight quarters (~$57.7 million to $98.4 million).
Having built up a large order backlog, CSE Global is expected to produce a higher net profit in CY18 as it delivers the orders. Given its recent contract wins, CIMB Research sees a possibility of CSE Global winning further large contract in the second half of the year, which could push the share price of CSE Global higher.
CSE global is currently trading 10.3x CY18F PE, which is below its five-year mean PE of 12x. CSE Global also gives investors a decent dividend yield of 5.7 percent, having committed to distributing at least $0.0275 dividend per share in FY17.
CIMB Research: CSE Global Limited (SGX: 544) – BUY, Target Price $0.56