KUCHING: Small cap index in Malaysia ended with a 12 per cent reduction last year, leaving them at a 50 per cent valuation discount to the FBM KLCI.
AFFIN Group Research Head, Loong Chee Wei, said the pricing gap is now shaping where investors and research houses are looking for value.
“The FBM KLCI was up 2.3 percent, but the FBM small cap index was down 12 per cent.
“And as a result, the valuations for the small caps are at a 50 per cent discount to KLCI, at 10 times price-to-earnings ratio (PE) versus 15 times PE for the KLCI,” he said during the AFFIN Group Market Outlook and Chinese New Year Celebration Dinner 2026 held at Sheraton Hotel recently.
He added that the valuation reset has driven Affin to expand coverage on selected small caps it expects could deliver returns.
“And we in AFFIN have initiated coverage on eight small cap stocks that we think would see a good return this year. So, a lot of companies are actually in areas where they are unique in their sectors and basically have a niche market to capture and are able to drive growth,” he said.
Loong said corporate exercises are another channel that can reprice stocks, especially if merger and acquisition activity accelerates.
“Secondly, corporate exercises will unlock values as well as pursue mergers and acquisition (M&As), and as it is, we have seen the announcement of Sunway offering to take over IJM,” he added.
He said easing funding conditions could lift leveraged transactions, including take-privates.
“Due to lending rates coming down, there will be more funding in terms of leverage buyouts, taking companies private,” he said.
He cautioned that some deal talk remains speculative.
“Like the telco, where Maxis is going to acquire UMobile. But all these are just our hypothetical expectations,” he added.
Loong also informed that cash-heavy balance sheets can increase incentives for privatisation when net cash is high relative to market value.
“So with that kind of cash, if you are a major shareholder, you might as well take it private and take the cash for yourself,” he said.
