In the ninth edition of this report, we have again mined for and unearthed more diamonds in the rough for 2024. The performance of all our “diamonds” has been sterling over the years (the performance of these stocks is detailed in Figure 1). These investment ideas are a selection of stocks chosen by our analysts, according to this criteria:

i. ROE of 15% or above;

ii. 2024 net debt/shareholder funds of <0.7x; iii. Increasing margins in 2024 vs that of 2023;

iv. Trading below their respective industry average multiples;

v. ESG score being above their country medians.

The table below is an overview of our 12 “diamonds”.

Our methodology uses a fundamental bottom-up analysis, coupled with RHB’s on-the-ground insights. Our sector analysts provided their assessments of the average market multiples for the respective sectors that the companies operate in. As one of the criteria is “trading below the average market multiples”, it means these stocks are out of favour currently. In parallel, the list was further refined based on our assessments of each company’s potential to grow margins without compromising on ROE, while having a low gearing level. In an environment of ever-changing interest rates, companies with a high debt/equity ratio would be penalised more. We also imputed inflation into our assessments, as we considered only companies that have grown their margins.

Q&A. We present several questions on the criteria and on what actually constitutes “diamonds in the rough” which we were asked on the previous edition of this report. We provide our answers in Figure 2.

Environmental, Social and Governance (ESG) score is a major criterion. Since mid-2021, we have assigned ESG scores to all companies under coverage and integrated them into our valuations. We believe sustainable investment strategies will continue to deliver above-market returns. This conviction is backed by a meta-analysis from the NYU Stern Centre for Sustainable Business and Rockefeller Asset Management. The study found a positive correlation between ESG and the financial performance of companies in most of the 1,000 research papers published between 2015 and 2020.

Our findings have resulted in a list of 12 pinpointed stocks that are listed below. This list represents companies that our analysts believe can chart robust earnings growth, due to sector- or company-specific reasons.

This is a long-term strategy. As it takes time for coal to turn into diamonds, we believe that – in due course – all the companies in the list below should show healthy absolute returns. The pages that follow describe why we consider these picks in our coverage universe to have such sterling characteristics, as classified by country.

Source: RHB Securities Research - 5 Mar 2024