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Small Cap Gem Series: 4 Exciting Small Caps That Are Set For A Year Of Growth

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Investing in small caps seems like a risky affair. However, do your homework and it can be highly rewarding. In this two part series, we focus on highlighting some of the small cap gems that have remained elusive to the market. These small cap gems have the potential to help your investment portfolio returns turn up a notch.

Investors Takeaway: 4 Exciting Small Caps That Are Set For A Year Of Growth By MBKE

  1. Jumbo Group

With earnings bottoming out in FY18, CIMB is confident that Jumbo Group (Jumbo) will grow ahead on stronger profit contributions from its Singapore F&B outlet and more overseas franchised outlets. Four new franchised Jumbo seafood outlets were added in four different cities – Taipei, Taichung, Fuzhou and Bangkok – over the past three quarters. There are now a total of 17 Jumbo seafood outlets across Asia.

Jumbo Expanding Its ‘Foodprint’ In Singapore And Overseas

Jumbo is looking to expand its ‘foodprint’ in Singapore despite having recently closed three underperforming stores (two Bak Kut Teh stores and one JPOT store). Jumbo is looking to launch another seafood outlet within the next six months together with one new Teochew cuisine restaurant and two more Tsui Wah Hong Kong cafes. The group is also looking to expand its network of franchised F&B outlets overseas, under its Jumbo Seafood and Ng Ah Sio Bak Kut Teh brands, in Asia.

BUY, TP $0.52; Current share price $0.405

  1. HRnetGroup

A one-off debt provision and fair value loss on financial assets resulted in a lower than expected performance for HRnetGroup. Excluding the one-off items, FY18 core net profit would have improved by 22.2 percent, driven by 9.3 percent year-on-year topline growth and gross margin.

Opportunities In Emerging Markets To Drive Contribution

Professional recruitment and China were the key earnings contributors in FY18. Moving forward, CIMB expects the newly consolidated businesses (REForce, Rimbun, Career Personnel) to ramp up in FY19F. HRnetgroup is also looking at opportunities for three openings in FY19F (i.e. Malaysia, Shenzhen and Shanghai) as well as a potential market in Vietnam.

BUY, TP $1.03; Current share price $0.785

  1. Memtech International

Memtech International (Memtech) ended 2018 with a fall in net profit due to rising production and start-up costs for new projects. However, this was largely in line with the market’s expectations as labour costs, input costs, and manufacturing yield were affected during the initial ramp-up for new projects. That being said, UOBKH is forecasting a good year ahead for Memtech.

Ramp-Up In Projects To Kick Off A Good Year For Memtech

UOBKH expects growth to come from several new projects in the consumer electronics and medical segments. Production in 1H19 is expected to pick up significantly as several new and existing multinational customers are targeting new product launches. As such, UOBKH has rated Memtech as a compelling BUY for a strong FY19F net profit growth of 31 percent. Its current valuation of 8.1 times FY19F price-to-earnings (26 percent discount to peers) also makes it attractive for investors.

BUY, TP $1.33; Current share price $0.945

  1. Japfa

FY18 was a year of recovery for Japfa. Japfa saw its FY18 EBIT grew by 81 percent year-on-year thanks to three segments: Stellar Indonesian poultry segment; Turn to profitability for its Vietnam’s other animal protein segment and; Steady growth in its dairy segment.

Protein Consumption Has Room For Growth

While MBKE notes that short-term cyclical volatility is inherent to the agribusiness sector, it believes that Japfa will continue to benefit from long term secular consumption growth trends. Operations in populous, high-growth emerging economies of Indonesia, Vietnam, Myanmar, India, and China where per capita protein consumption is still low (due to low penetration levels of industrialised farming) creates opportunities for Japfa to tap on over the long-run.

Among the APAC upstream food stocks, Japfa is the cheapest. It currently trades at a major discount to its peer baskets of upstream APAC feed and protein producers and China dairy firms.

BUY, TP $1.05; Current share price $0.680

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