Small caps are expected to have moderate performance in 3Q2017 as the Straits Times Index (STI) gained 14.9% year to date (YTD). Previously, small cap stocks that were picked for CIMB Research’s portfolio outperformed the STI.

They consist of five stocks namely; Memtech, UMS, Sunningdale, AEM and Riverstone. The stocks have been well received by the market but performance is expected to be weaker.

UMS and Sunningdale has been removed from the list of top picks for the segment and have been replaced by Valuetronics and mm2. We’ll look at some of the notable investment merits highlighted by CIMB Research.

1. AEM Holdings

In review of its 2Q2017 results, AEM came in above the expectations with its 1H17 profit reaching 67% of analysts’ full-year expectations.

That was driven by strong revenue growth in its main business despite suffering a one-off loss from currency exchange of receivables.

As the company saw a higher revenue, its management updated its profit guidance and now expects a revenue of at least $200 million for FY2017.

Although AEM has added some debts this year, the company remains in net cash position after accounting for the inflow of $9.7 million from its operations in 2Q17. Industry forecast shows that the outlook of the semiconductor industry will remain positive in 2017 and 2018.

Analysts from CIMB Research reiterated their “Buy” call for AEM Holdings Limited (SGX: AWX) and kept it on its list of small cap stock pick. They gave AEM a higher target price of $3.43.

2. Memtech International

Profits for Memtech came in within 1H17 expectations filling 44% of analysts’ full year forecast. Seasonally, Memtech performs better in the second half of the year.

In 2Q2017, Memtech’s core profit came in at US$1.9 million as compared to a loss of US$1.5 million 2Q2016. The net profit was even stronger due to one-off contribution from its sale of land and factory in Huzhou.

Its automotive and consumer electronics segment should remain supportive towards Memtech. Cash position of Memtech is more than healthy as it holds an approximate 28% equivalent of its market cap in cash.

Analysts from CIMB Research Research reiterated their “Buy” call for Memtech International Limited (SGX: BOL) and maintain a target price of $1.16. They cited a dividend yield range of 3.0% to 5.0% with a potential of special dividend from the disposal of two land assets.

3. Valuetronics Holdings

With a return of over 100% in a year, will Valuetronics continue to offer investors “VALUE” as its Bloomberg code suggests?

In 1Q2018, Valuetronics core profit reached HK$50 million, which is ahead of the full year forecast at 29%. Strong growth from its consumer electronics and industrial & commercial electronics segments were the main drivers.

In consumer electronics, the commencement of production of second generation smart lighting has benefited the business. It is expected to see end market growth and higher penetration in Asian markets.

As cars increases their connectivity, demand for order from the automotive industry is expected to continue to grow.

The company has a healthy balance sheet that will support dividends given its zero borrowings and a cash position that is equivalent to approximately 41% of its market cap.

Analysts from CIMB Research Research reiterated their “Buy” call for Valuetronics Holdings Limited (SGX: BN2) with a target price of $1.02.

4. mm2 Asia

mm2 Asia came in within expectations for its 1Q2018 as its core PATMI grew 33% to $6.6 million. Profitability received a strong boost with a higher gross margin of 62.4%.

Unusual Entertainment is expected to contribute further to the company as they rollout more projects. In the coming months, they have lined up concerts for Foo Fighters, GEM and Angela Chang.

In the next 12 to 18 months, mm2 has at least 38 productions in its pipeline for Singapore, Malaysia and North Asia.

Further mergers and acquisitions of other companies and securing new movie rights may be a catalyst to mm2 given that it has just raised a $157 million war chest.

Analysts from CIMB Research Research gave mm2 a “Buy” call for mm2 Asia Limited (SGX: 1B0) with a target price of $0.58.

5. Riverstone Holdings

With a higher raw material and production costs, profit for Riverstone fell in the latest quarter. The rise in costs have offset the 36.1% gain in revenue as profit fell by 0.8%.

However, the 1H2017 performance is still within expectations from the street as Riverstone is at 44% of its full year profit forecast.

Demand for its products remains strong driven by increased demand from cleanrooms used in manufacturing tablets and stable orders from the healthcare sector. Its strong net cash position of RM85.3 million gives it ample cash for expansion to meet its demand.

Analysts from CIMB Research Research reiterated their “Buy” call for Riverstone Holdings Limited (SGX: AP4) with a target price of $1.20.