Top 10 bargain stocks you should consider

Malaysian Business, Nov 1, 2007 by James S

WITH the Kuala Lumpur Composite Index (KLCI) having rallied close to 30% for the year to date, it is certainly becoming harder for investors to find new undiscovered jewels to put their money in.

However, while the benchmark index has registered total returns (capital gains plus dividend yields) of 29.6% year-to-date (YTD) as at Oct 10, or 48% on a 12-month basis, there are still 37 component stocks that have underperformed the index on both counts (see table). Moreover, the sharp market correction on Oct 22 made these stocks even more attractive that week.

Analysts say a number of these laggard stocks could still play catch-up with the rest of the market. This is especially so for stocks whose prices took a beating over short-term uncertainties or negative news flow, even though their longer term fundamentals are still intact.

But which of these laggards are the attractive ones? Based on a discussion with analysts and market strategists, we present below a list of 10 of the big-cap laggards (all of them component stocks of the KLCI) that investors should consider looking at.

They are:

(i) Astro All Asia Networks Plc; (ii) Proton Holdings Bhd; (iii) Tenaga Nasional Bhd; (iv) Kurnia Asia Bhd; (v) Malayan Banking Bhd; (vi) Hong Leong Bank Bhd; (vii) EON Capital Bhd; (viii) Telekom Malaysia Bhd; (ix) DRB-Hicom Bhd; and (v) PLUS Expressways Bhd.

ASTRO ALL ASIA NETWORKS PLC

Looking at the privatisation angle

ACCORDING to an investment report from KAF-Seagroatt & Campbell Securities (KAF), Astro as a local pay-TV monopoly represents a classic example of a breakdown between a company's sound long-term business strategy and its performance in the equity market. The research unit says that from a strategic perspective, Astro, which expanded overseas into Indonesia and is in the midst of doing the same in India, actually has a good case for business expansion through diversification into overseas markets.

This is because if such ventures are successful, the benefits to the company would be immense as it brings to the table economies of scale beyond its core and relatively small Malaysian market. KAF says the overseas strategy would enable growth beyond the saturation point, expected in a few years' time, of Astro's domestic market.

So what went wrong? To use a strong term, the company's maiden overseas venture in Indonesia was a disaster. As a result, the market got spooked and severely penalised Astro for that.

The share price has fallen by 45%, from its peak of RM5.70 in February 2007 to a low of RM3.16 a few weeks ago, although it recovered to around RM3.68 on the back of rumours that the company would be taken private by the major shareholder. Even so, as at the time of writing, Astro has underperformed the KLCI by 61% so far this year.

Astro's investment in Indonesia with PT Direct Vision (PTDV) suffered several setbacks - from paring its initial stake in PTDV of 51% to 20% to getting proper licensing for its pay-TV operation. More recently, it recognised a loss of RM160 million for its operations. In fact, Astro has said it is looking to close its operation with PTDV, which is owned jointly with local partner Lippo Group.

As a result, the market is now getting cautious about Astro's India prospects. Astro has a joint venture with the Maran Group to provide DTH digital satellite pay-TV services on the sub-continent. Under the agreement, Astro will take up a 20% equity stake in Sun Direct TV, with the balance 80% held by the Maran Group. With a total funding cost of US$671 million, the operation is expected to be rolled out by year-end.

KAF says despite its overseas problems, Astro is actually undervalued, with most of its problems already reflected in the price. In addition, the company has absolute share of the mass pay- TV market in Malaysia.

Analysts are also speculating that given the poor share price performance and the group's short and long term mismatch in expectations, Astro's major shareholder Ananda Krishnan may actually undertake a privatisation exercise for the group, as he did with Maxis Communications Bhd recently. The premium is said to be in the region of 20%, should it happen.

Nonetheless, even without this privatisation angle, the market is still looking at a fair value target of RM4.70 for Astro, based mainly on the discounted cash flow earnings of its Malaysian operation. A privatisation at a good premium would however be a bonus for the group's shareholders, needless to say.

PROTON HOLDINGS BHD

Will marriage be the answer?

IT'S reckoning time for Malaysia's ailing national carmaker and time is running out for Proton to find a suitable foreign partner to help ramp up its operations, say analysts. The problems at Proton have been well known for some time, with the carmaker suffering falling market share, continued perceived quality problems and a lack of new model launches.

The delay in getting the foreign partner has contributed to a negative perception of the company's prospects by the investment community. Worse, Proton made a huge net loss in its FY07 results ended March 31 of RM591.3 million. Without a foreign partner to lift sales and operational efficiencies, the market is looking at continued losses for the group in the next few years.