THE FBM KLCI closed at its lowest level in four years last Tuesday, amid continued volatility induced by the US-China trade war and slow global growth adding to recession fears.

Uninspiring second-quarter earnings results have eroded the risk appetite of investors as well, resulting in the 30-stock benchmark FBM KLCI closing at 1,590.84 points last Tuesday. It recovered slightly to end last Thursday at 1,595.18.

The equity market has seen several knee-jerk reactions in the past year, such as the change in government in May last year after the 14th general election and US President Donald Trump’s tweets, especially about new tariffs on Chinese goods, which would send technology counters on a downward spiral.

One wonders whether investors have discarded the basic rule of stock investing — to invest in companies with strong fundamentals and solid balance sheets that deliver decent returns to their shareholders.

TA Investment Management chief investment officer Choo Swee Kee believes that investors are still looking for fundamentally strong stocks, except that they may not have the time do so.

“In the past, Malaysian retail investors had a tendency to be emotional and traded largely based on sentiment and news flow. Today, they have evolved into sophisticated investors who evaluate the fundamentals of companies before buying,” he tells The Edge.

“As many do not have the time to do this evaluation, they tend to ignore the market rather than buy blindly. This is probably one reason retail participation in the market has been declining.”

With over 900 companies listed on Bursa Malaysia, how does one separate the fundamentally strong from the weak?

One can look at return on equity (ROE), for example, which is one of the most common indicators for investing. The Edge takes a look at 10 companies that have reported strong ROE figures of above 15%, which were higher than their five-year average ROE numbers. These stocks also have reasonably strong “buy” calls from analysts and almost all are in a net cash position.

Carlsberg Brewery Malaysia Bhd

Based on its latest set of trailing 12-month (TTM) earnings, Carlsberg Brewery Malaysia Bhd’s ROE was a whopping 200.57%, more than double its five-year average. However, its TTM price-earnings ratio (PER) of 30.55 times would make it an expensive choice for any retail investor. Compared with a year ago, Carlsberg’s share price has risen 32% to close at RM25.70 last Thursday.

In the second quarter ended June 30, 2019 (2QFY2019), Carlsberg reported 2.1% growth in net profit to RM65.26 million, thanks to the continual premiumisation of its portfolio in Malaysia and Singapore. Quarterly revenue climbed 15.7% year on year to RM480.52 million.

Kenanga Research says in an Aug 16 note following the release of Carlsberg’s 2QFY2019 results that, moving forward, earnings will be driven by premiumisation as its attractive premium beer portfolio continues to gain footing, tapping the shifting consumer palate.

The research firm adds that the demand for beer remains inelastic, saying that the previous price hikes from the Sales and Services Tax and cost pass-through adjustments had little impact on overall consumer demand.

Kenanga has an “outperform” call on Carlsberg with a target price of RM25.95.

“At this juncture, we deem our valuations to be fair as we value Carlsberg at a premium against its peer Heineken Malaysia Bhd, despite the latter’s market leader position in Malaysia. While both operate in a defensive business environment with healthy dividend returns, we note a shift in market share between the brewers.

“For the past three years, Carlsberg has been gaining market share (from 37% to 41%) at the expense of Heineken Malaysia’s declining market share (from 63% to 59%) based on our back-of-the-envelope calculations,” Kenanga says.

Carlsberg has seen a recent change at the top. Managing director Theodoros (Ted) Akiskalos has resigned from the company after just four months on the job, citing family reasons. The search for his successor is underway.

D&O Green Technologies Bhd

The slowdown in China’s economy may have impacted D&O Green Technologies Bhd’s share price, which had fallen 31% year on year to 50 sen last Thursday.

This is in spite of the group’s strong fundamentals — it managed to garner an ROE of 58.6%.

D&O operating subsidiary Dominant Opto Technologies Sdn Bhd is one of the world’s leading surface-mount LED manufacturers for the global automotive industry. Its in-house branded Dominant has an estimated global market share of 5%.

China is D&O’s largest export market, accounting for 45% of revenue. In the second quarter ended June 30, 2019 (2QFY2019), D&O reported a 26.6% decline in net profit to RM5.97 million, mainly due to the absence of a government grant of RM2.2 million in 2QFY2018. Although its automotive segment’s sales increased in 2QFY2019, group revenue only saw a 1.6% year-on-year rise to RM115.04 million as it was brought down by a decline in its non-automotive segment.

D&O says in its latest quarterly report that in the longer term, the group believes the prospects for automotive LED remain bright and intact, driven primarily by rising LED adoption in automotive lighting applications in pursuit of improved safety features, better driver and passenger comfort and a more attractive aesthetic.

In its Aug 22 note on D&O, PublicInvest Research says, despite sluggish car sales in China during the first half of 2019, the research firm sees a gradual recovery in buying interest for D&O on the back of the issuance of more new-licence car plates in major cities in China, such as Guangzhou and Shenzhen, and the rollout of more new car models that comply with China’s new vehicle emission standards, which came into force on July 1.

PublicInvest Research adds that the decline in China’s auto sales likely bottomed out in May, which is an indication that a recovery is on the way.

It has an “outperform” call on D&O, with a target price of 73 sen, indicating a potential upside of 46%.

Bermaz Auto Bhd

Bermaz Auto Bhd (BAuto), which is principally involved in the distribution and retailing of Mazda vehicles in Malaysia and the Philippines, recorded a commendable ROE of 50.9%, surpassing its five-year average ROE of 39.3%.

It is worth noting that the group is in a comfortable net cash position of RM320.17 million as at its financial year ended April 30, 2019 (FY2019), with zero short-term borrowings.

BAuto’s year-on-year net profit jumped 89.5% to a record high of RM265.27 million in FY2019, while revenue rose 25.1% to RM2.49 billion.

Compared with a year ago, BAuto shares have risen 17% to close at RM2.29 last Thursday.

Analysts covering the stock are sanguine about its prospects, with 13 out of 14 calling a “buy”.

Maybank Investment Bank Research cautions in an Aug 22 note that weak sequential and year-on-year Mazda sales could hit 1QFY2020 (May to July 2019) earnings as Mazda is in transition with regards to introducing its facelift CX-5 model in September. Production would likely begin in August.

Nevertheless, the research firm says, with softer earnings expectations for 1QFY2020, this could represent a better window for investors to accumulate BAuto shares.

“Yields are still good at more that 7%, based on a 90% dividend payout ratio. Catalysts could come from a stronger-than-expected demand for the new CX-8 model and the strengthening of the ringgit against the yen,” says Maybank IB.

It has a “buy” call on BAuto, with a target price of RM3.05, an upside of 33% to its closing price last Thursday.

Uchi Technologies Bhd

Penang-based Uchi Technologies Bhd is another example of a fundamentally strong company, with a ROE of 34% surpassing its five-year average ROE of 27%. Another sweetener for investors is the group’s pretty strong balance sheet with net cash of RM118.9 million as at June 30.

Uchi specialises in the design, research, development and manufacturing of electronic control systems, including software development, hardware design and system construction.

The group’s products — which are primarily electronic control modules for coffee machines — are mainly exported to Europe, including Switzerland, Portugal and Germany. One of the group’s main customers is Jura, a Swiss premium automatic speciality coffee machine maker.

For its second quarter ended June 30, 2019 (2QFY2019), Uchi reported a 15.3% year-on-year rise in net profit to RM17.28 million, thanks to an increase in demand as well as a stronger US dollar against the ringgit. Revenue for the quarter rose 17.4% to RM39.19 million.

Compared with a year ago, Uchi shares have declined 5% to settle at RM2.81 last Thursday. Affin Hwang Capital is maintaining a “buy” call on the stock with a target price of RM3.09, or an upside of 10%.

“With dividend yields of 6%, Uchi remains a compelling yield play as we expect demand for automatic coffee machines to remain relatively sturdy, supported by its customer Jura’s expansion into new markets.

“Furthermore, there could be potential earnings growth upside should the development of its new products and customers materialise. Downside risks are a stronger ringgit, weaker sales of coffee modules and slower-than-expected rollout of its new products,” the research house says.

Syarikat Takaful Malaysia Keluarga Bhd

Syarikat Takaful Malaysia Keluarga Bhd’s (STMB) latest ROE of 33.2% is higher than its five-year average ROE of 26.8%. STMB is 59.6% owned by BIMB Holdings Bhd.

Investors have taken note of STMB’s performance with its share price shooting up 55% year on year to close at RM5.80 last Thursday.

For the first half of its financial year ended June 30, 2019 (1HFY2019), STMB reported a 47.3% year-on-year increase in net profit to RM177.39 million on the back of 23.5% revenue growth to RM1.59 billion, thanks to higher sales from its family Takaful business and higher net Wakalah fee income arising from the growth in family Takaful.

In its financial report, STMB says that despite business sentiment remaining cautious this year, the Takaful industry is expected to outperform conventional insurers in view of strong demand for takaful products.

Affin Hwang Capital maintained its “buy” call on STMB in a July 26 note with a target price of RM8.40, indicating a potential upside of 45% to its closing price of RM5.80 last Thursday.

“As management’s strategy is to improve profitability and returns in 2HFY2019, we anticipate lower exposure to the higher-claim employee benefit and motor segments, hence, slower top-line growth, but the overall claims experience is expected to improve,” the research firm says.

Lee Swee Kiat Group Bhd

Lee Swee Kiat Group Bhd (LSK) may not be a familiar name to many investors, but the group is a heavyweight in the furniture industry. It is the largest natural latex bedding manufacturer in the country. Its portfolio of brands includes Napure, Englander and Tempur.

LSK’s latest ROE of 24.5% surpasses its five-year average of 15.3%. The group is in a net cash position of RM16.34 million as at June 30.

LSK managing director Datuk Eric Lee Kong Sim told The Edge Financial Daily in an interview in May that the group was keeping some buffer cash for potential mergers and acquisitions. He added that the group will only acquire companies that offer synergistic qualities that can help fortify LSK’s brand portfolio and industry position.

For its second quarter ended June 30, 2019 (2QFY2019), LSK reported a 22.7% year-on-year decline in net profit to RM1.56 million, while revenue fell 1.1% to RM22.76 million. The group says the US-China trade war has affected the economies of certain countries, which in turn has impacted export sales. LSK also incurred higher depreciation charges, mainly due to the full capitalisation of a new production line, and due to the MFRS 16 requirements whereby all operating leases, including tenancies, are to be capitalised and depreciated according to the tenure.

Compared with a year ago, LSK’s share price has fallen 34% to end at 65.5 sen last Thursday.

In an Aug 26 note, CGS-CIMB Research says it expects LSK to record stronger results in 2HFY2019, premised on increased sales of semi-foam latex mattresses to existing and new export markets, higher economies of scale and lower latex prices.

“We also expect LSK to benefit from its efforts to improve cost efficiencies through more automation in its manufacturing process — [such as] a new robotic arm and a new vaporiser that can reduce natural gas usage by 40% to 50%,” the research house says.

CGS-CIMB Research maintains its “add” call on LSK with a target price of RM1.21, an upside of 98%.

“We believe LSK has a strong investment case, given its robust earnings prospects, attractive valuations and strong fundamentals. Potential rerating catalysts include a decline in latex prices and higher mattress sales. Downside risks are a surge in latex prices and a weaker US dollar against the ringgit,” says CGS-CIMB.

Pentamaster Corp Bhd

Pentamaster Corp Bhd’s current ROE of 20.97% is slightly higher than its five-year average of 20.83%.

The automated test equipment manufacturer’s net profit for the second quarter ended June 30, 2019 (2QFY2019) grew 40.1% to RM19.54 million year on year on improved operating efficiency.

Quarterly revenue was up 18.03% to RM120.74 million year on year on the back of higher sales from both the automated test equipment and factory automation solutions operating segments.

The group is cash rich with net cash of RM404 million as at June 30.

In a Aug 19 note, CGS-CIMB Research says it expects better earnings delivery from the group in 2HFY2019, driven by a new tester for the vertical cavity surface emitting laser (VCSEL), a higher utilisation of its Batu Kawan plant and positive momentum in 3D-sensing adoption by Android-based smartphone players.

CGS-CIMB Research has an “add” call on Pentamaster with a target price of RM4.20, indicating a potential upside of 20.3% to its closing price of RM3.49 last Thursday.

Compared with a year ago, Pentamaster’s share price has increased 55%.

Hibiscus Petroleum Bhd

Hibiscus Petroleum Bhd reported a net profit of RM230.01 million for the financial year ended June 30, 2019 (FY2019), up 12.9% year on year, thanks to contribution from its North Sabah asset. This was the first full year the Malaysian asset was under the group’s operation. Revenue surged to RM988.30 million from RM394.34 million previously.

Hibiscus’ current ROE is 20.6%. The group is in a net cash position of RM273.54 million as at June 30. Compared with a year ago, Hibiscus’ shares have declined 18% to close at 90 sen last Thursday.

All three analysts that cover the stock have a “buy” call on it. PublicInvest Research is reiterating its “outperform” call on the stock with a target price of RM1.73, a 92% potential upside to its closing price last Thursday.

“We remain positive on Hibiscus’ earnings outlook given its ongoing initiatives to constantly increase production,” the research firm says.

Frontken Corp Bhd

It has been a good year for shareholders of Frontken Corp Bhd, which provides specialised services such as precision cleaning, refurbishment and coating to the semiconductor industry. Its share price has risen 91% to close at RM1.58 last Thursday. It recorded a ROE of 20.5%, surpassing its five-year average of 9.6%.

For the six months ended June 30, 2019 (1HFY2019), Frontken’s net profit rose 73.6% year on year to RM31.92 million on the back of 7.4% growth in revenue to RM163.97 million, thanks to an improved performance by its Singapore subsidiary.

HLIB Research has a “buy” call on Frontken with a target price of RM1.77, a potential upside of 12%.

“We expect Frontken to experience multi-year growth ahead, on the back of a sustainable global semiconductor market outlook and a strong balance sheet, with net cash of RM151 million or 14.3 sen per share,” the research firm says.

Kelington Group Bhd

Kelington Group Bhd, which specialises in ultra-high purity (UHP) gases delivery systems, saw its most recent ROE at 16.8%, higher than its five-year ROE of 10.9%.

For the first half of its financial year ended June 30, 2019, Kelington’s net profit rose 15.47% year on year to RM9.94 million on lower cost of sales.

Revenue, however, eased 2.44% to RM171.49 million thanks to the lower progress billing for its China UHP project.

RHB Research says in an Aug 23 note that it expects a stronger second half from Kelington, premised on seasonality and stronger billings of higher-yielding UHP projects.

The firm has a “buy” call on Kelington with a target price of RM1.63, an upside of 31% to its closing price of RM1.24 last Thursday. Compared with a year ago, Kelington’s share price has increased 46%.