The allure of nutraceutical players

THE nutraceutical industry is one that is well represented on the local bourse. It is said that this sector has significant potential due to the increasing health consciousness of the public.

But companies in this sector seem to have diverse fortunes.

Two weeks ago, a smallish company called OB Holdings Bhd, a firm that makes fortified food and dietary supplements, listed on the ACE Market of Bursa Malaysia at a historical price-to-earnings (PE) multiple of 17 times.

OB Holdings, which makes and sells its own brands, as well as for third-party brand owners, notes that the fortified food and beverage (F&B) and dietary supplements industry in Malaysia grew from RM11.82bil in 2018 to RM16.91bil in 2023, registering a compound annual growth rate (CAGR) of 7.43%.

It is this market that players in this industry are after and more. A number of nutraceutical players in Malaysia export their products.

However, if you take the largest player in this market, namely, DXN Holdings Bhd which has a market capitalisation of RM2.82bil, the stock only trades at a historical PE of 8.2 times.

And then you have the well-known Amway (M) Holdings Bhd, which also has a low PE of 8.38 times.

All four research houses covering DXN have strong “buy” calls on the firm. Bloomberg data show that the consensus 12-month target price for the stock is 84 sen, indicating a nice 60% upside.

However, DXN’s share price has largely failed to perform since its listing in May 2023 at a price of 70 sen a share. Analysts had been also bullish about the stock then.

Notably, DXN had a disappointing second quarter ended Aug 31, 2024 of financial year 2025 (2Q25), with the company’s net profit dropping by 13% from a year before. This was due to foreign exchange losses, as well as higher employee benefits and shipping costs.

Maybank Investment Bank (Maybank IB) Research has shaved a tiny bit of its target price and earnings estimates of DXN to reflect the second quarter’s weaker results as well as expectations of a softer 3Q and 4Q.

The research house does point out that DXN continues to trade at an undemanding PE of eight times and has a strong positioning which continues to advance in markets like Latin America.

RHB Research maintains that DXN’s long-term growth prospects remain intact and that valuation remains attractive considering its “effective business model”.

By this, RHB Research is referring to the fact that DXN controls the entire value chain, from research and development to cultivation, manufacturing and distribution.

In addition, the research house points out that DXN has a “sturdy balance sheet to facilitate a generous dividend payout”, considering that it was in a net cash position of RM521mil as at 2Q25.

Up to April this year, DXN paid out RM179.3mil in a series of dividends. It paid out similar dividends in two more quarters after that.

It has a dividend policy to distribute at least 50% of its profit after tax and minority interests (Patami).

But even that doesn’t seem to excite investors.

Year-to-date, DXN’s share price has seen a near 20% decline, closing at 54 sen yesterday.

Despite their “buy” calls, analysts have highlighted the risks associated with DXN. One is the long-standing point that investors have little visibility on DXN’s overseas operations, especially in South America.

“Investors in the consumer space tend to rely on ground checks to get a sense of the performance or outlook of the companies in their portfolios, which may prove to be less easy in DXN’s case,” RHB Research notes.

Meanwhile, Amway currently trades at RM6.86 a share, significantly below its all-time high of RM12.20.

Despite its low PE, there are no “buy” calls on the stock. The bearish view largely stems from the fact that Amway only operates in the local market as the brand has different operators for each country.

Additionally, the Malaysian market for Amway may have reached saturation point. The firm has suffered many quarters of revenue declines since mid-2022.

Meanwhile, newly-listed OB Holdings has plans to set up a new factory in Serendah and to venture into Indonesia.

One of its new products is Bonlife SachaQ10 Plus Softgel, essentially a plant-based Omega 3 oil to improve hyperglycaemia, hypertension and hyperlipidaemia.

Nevertheless, it is still early days to gauge this newcomer.

OB Holding’s share price is still holding up from its IPO earlier this month, with a market capitalisation of RM99.86mil.

A similar size nutraceutical player is Nova Wellness Group Bhd which has a market capitalisation of RM146.6mil and trades at a PE of 18.83 times.

Nova Wellness makes dietary supplements, functional food and skincare and it is ramping up production at its new plant. Kenanga Research has a “buy” call on the stock, with a target price of 63 sen, a 37% upside from its current price of 46 sen.

The research house reckons that the group has superior margins and growth prospects stemming from its capacity expansion.

Kenanga Research said demand would be buoyed by “changing dietary habits due to busy lifestyles boosting the demand for vitamins and supplements.”

While the sector looks promising, it also presents potential pitfalls. Chiefly, the risks in the industry can be seen from the experience of some companies.

One is Bioalpha Holdings Bhd. During its heyday, Bioalpha was touted as a local champion in its attempt to bring local herbs like Kacip Fatimah and Misai Kucing to market through its products.

However, the tide turned in 2020 when it began to report multi-year losses.

Other examples are Hovid Bhd and its subsidiary Carotech Bhd. Both were listed in 2005 with much fanfare and promise – Hovid as a manufacturer of pharmaceutical and herbal products while Carotech pioneered the extraction of Vitamin E from palm fruits.

Analysts had been bullish on both, but they largely failed to deliver and were delisted.