THE US Federal Reserve’s aggressive interest rate hikes to combat persistent high inflation made it a rough year for financial markets as global financial conditions tightened. Despite the difficult investing environment, research outfit Asia Analytica Sdn Bhd once again saw its top picks beating the benchmark index. Case in point: The stocks saw an average return of -3.8%, slightly outperforming the FBM KLCI, which had lost 5.8% as at Dec 19.

“The 2022 top picks were selected based on three major themes — digital transformation, exports and recovery — but not all have performed up to expectation. As a result, our equal-weighted portfolio lost 3.8%, which was helped by SCGM’s business divestment, recovery in oil and gas (O&G) drilling prospects, as well as the inevitable opening up of the economy, which lifted shopping mall operations,” it said.

SCGM Bhd topped the list with a total gain of 47.6%. The portfolio scored a windfall, as SCGM is distributing its core business disposal proceeds of about RM425 million through special dividends as well as capital reduction and repayment exercises. On May 10, 2022, SCGM managed to unlock its business value by selling its core plastic packaging business to Japanese firms Mitsui & Co and FP Corp for RM544 million, or a premium of 22% over its closing price and implied 16 times price-earnings ratio (PER) of RM34 million in FY2021.

In a note posted at end-2021, Asia Analytica said it liked SCGM, as it deemed the group’s valuation at the time relatively inexpensive at 12.8 times PER, considering that the group holds ample capacity for revenue growth and enjoys stable product demand, owing to high exposure to the food and beverage sector.

Second among the research house’s top picks is Velesto Energy Bhd, which saw a gain of 33.3%, for the year to Dec 19. Asia Analytica says the stock was selected for its view that its O&G drilling rig utilisation rate would do well, as high fuel prices would draw investments to the O&G sector. In addition, daily charter rates will improve, given increasing demand, coupled with low rig supply, which has been diminishing over the years because of a lack of new investments in the industry.

Yet, with the lack of consistent positive financial results in 1HFY2022, Velesto Energy’s share price was rather volatile in FY2022 — dropping to an all-time low of 7.5 sen in July, before recovering to 16 sen per share in December.

Nevertheless, the 2023 activity outlook for Petronas remains positive for Velesto Energy, suggesting continued recovery activities as were seen throughout 2022. Specifically in 2023, the planned number of jack-up rig utilisation is expected to jump to 12, from nine, while hydraulic workout units are expected to rise to eight, from six. This bodes well for Velesto Energy.

Taking the third spot in Asia Analytica’s top picks is Sunway Real Estate Investment Trust, with a total gain of 8.8%. The stock was chosen at the time because it offered an attractive risk-reward ratio, given that its share price had fallen 26% from its peak in 2019 and traded at the lower end of its historical price-to-book ratio.

Indeed, with the opening-up of the economy, Sunway REIT’s earnings recovered — as it phased out rental support to its tenants in tandem with higher retail traffic — and so did the share price.

As for the losers, Awanbiru Technology Bhd tops the list with a total loss of 41%. The stock was selected based on Asia Analytica’s belief that it had good earnings potential on its cloud venture as well as shielded downside risk on potential government compensation for the termination of Sistem Kawalan Imigresen Nasional (SKIN), a new border control system that was to replace the current Malaysian immigration system — both of which failed to materialise. In addition, the stock was purchased at a hefty valuation of six times price-to-book ratio.

UEM Edgenta Bhd was the second-biggest loser, down 33% for the year to Dec 19. The group disappointed in its earnings, especially in its healthcare support segment, which more than offset the recovery in earnings of the infrastructure services, causing the company’s profit before tax to fall 3.8% year on year. In addition, UEM Edgenta’s margin is highly susceptible to pressures amid an inflationary environment.

Lastly, VS Industry was down 31%, as the stock was hit by both downward ratings in valuation — in view of concerns over slowing end-demand for consumer electronics, given a potential global recession — and falling financial results stemming from operational inefficiencies. In terms of prospects, VS Industry expressed a rather cautious stance on its demand outlook.

Moving into 2023, in view of a high probability of a global recession, Asia Analytica says it will be leaning towards a defensive investment mode, favouring high-dividend-yielding stocks.