My Market Observations

Rex Bhd is a laggard in the Food and Beverages Sector but may not be for much longer?

skoh888
Publish date: Thu, 02 Jun 2022, 11:41 AM
skoh888
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I watch and trade markets based on observation and logic. Leave the emotion and ego at the door and you will survive!

Food and Beverages(F&B) stocks have been the rage in recent weeks and have outperformed most sectors in the current bear market. This was quite perplexing as one would have thought that rising raw material costs would be a big dampener on earnings and future profit growth. Combing through ideas for a laggard F&B stock. I came across Rex Bhd. 

 

A cross section of F&B companies

                                        YTD              PER            NTA(pershare)     Current Share Price

1) BJFood                      UP 106%          18X            RM1.25                    RM4.57

2) Texchem                   UP 229%           15X            RM2.39                    RM3,96

3) OFI                            UP 8%               13X           RM0.92                    RM1.00

4) Power Root Bhd       UP 14%              26X           RM0.64                    RM1.67

5) Cocoaland                UP24%               26X           RM0.57                    RM1.27

6) Rex Bhd                    DOWN12%        47X          RM0.26                    RM0.215

 

PER vs NTA comparison

Rex is clearly the most expensive F&B stock on this list based on PER alone. However it also happens to be the smallest cap stock among the list with a market cap of only RM104M. Given its small cap status one can argue that it can demand a higher PER. However it is also the only F&B stock to trade below its NTA which is rare since most consumer stocks do have a price to book of over 1.0. It has also severely underperformed its peers and is clearly a laggard which looks promising. The only IB report I managed to find was one by CIMB Resesarch which was written in November last year.

Margin compression

Margin compression has been the biggest proplem faced by F&B companies since raw material prices from wheat to palm oil have gone through the roof. Despite these hurdles, most F&B companies have still reported good profit numbers and there is indication that the cost may soon be passed on to consumers in the raising of product prices. 

With the Federal Reserve raising interest rates aggressively in its fight against inflation would be positive for F&B companies. if the cost can be passed down and if peak commodity prices are around the corner, would be a big positive for future earnings.

 

Price reaction to financial results reports have been positive 

This was seen across the board in the F&B sector signalling that investors view there is more profit growth in the coming quarters. In contrast plantation stocks were sold off recently despite bumper profits which could mean investors hold a view that peak earnings are upon us

 

Chase the winners or go with the laggard?

Perhaps the most difficult question to answer. Really depends on what you think the fair value is for the company you wanna buy and the risk to reward from current prices. I do own shares in BjFood which I purchased at RM3.00 but would not buy it at the current price. I do not own Rex now but may look to buy it in the near future. 

 

Disclaimer: I am not a 'guru" nor do I aspire to be one. There are more than enough of those people around. Just sharing a little information which is hopefully useful to all.

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Be the first to like this. Showing 5 of 5 comments

skoh888

F&B stocks still shining today led by BJFood and Powerroot....Kawan Food also moving today

2022-06-03 11:31

dragon328

skph888, thanks for sharing. But what F&B business is Rex exactly in?
Any sign of its business registering good growth?

2022-06-04 10:31

skoh888

Hi dragon328, I believe Rex is in the canned food and beverages segment with the majority of the target market being the B40 income segment which explains the poor margins that they have

2022-06-05 16:58

skoh888

However the big catalyst I see is that they are most likely going to into higher margin products going forward as well as the high possibility of raising their existing product prices soon. I also see more M&A activity happening in this sector as witnessed by the recent Cocoaland privatization plan

2022-06-05 17:01

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