No accounting for taste

WHAT is it about investors in Malaysian stocks and their fascination with food retail companies?

They have scrambled for shares in recently listed Empire Premium Food Bhd, just the way they did for Oriental Kopi Holdings Bhd, which went to market more than a year ago.

Our capital market now ascribes both counters with valuations of 29.2 and 35 times their historical earnings.

And yet these are not businesses with high intellectual properties. They are also not that difficult to replicate.

With the right recipes, funding, staffing and initial funding that enables you to scale, you could be the next big thing for investors.

But when OldTown Bhd (operator of the OldTown White Coffee chain of café outlets) listed back in July 2011, it was priced at merely 13 times its financial year 2010 (FY10) earnings. Its share price didn’t trade at anything close to the 30 times that Oriental Kopi trades at today.

OldTown was then bought out in 2018 at a price that valued it at 23.63 times FY17 earnings, which all shareholders happily accepted. So how does one now explain the lofty valuations similar consumer stocks are trading at today?

Is it a case of trapped liquidity in our market, largely because our government linked investment companies (GLICs) are limited in their ability to invest abroad?

Notably, the assets under management of these GLICs – at around RM1.8 trillion – are disproportionately large for a country and population of our size.

Does this then contribute to the irrational passion investors have for locally listed food and beverages (F&B) stocks as well as other stocks that seem to be priced higher than global peers?

That said, and despite not having a high moat, both Empire Premium Food (that runs the Empire Sushi chain) and Oriental Kopi have been able to sustain their earnings growth and benefit from the niches they are in.

Empire Sushi caters to the lower-income group with affordable sushi while Oriental Kopi is riding the tourism boom in Malaysia. But expect competition to heat up.

Many retail F&B operators in Malaysia must be salivating at the prospect of getting their shares valued so high.

In the case of Empire Premium Food, the owners paid themselves a tidy RM165.5mil (from dividends prior to the initial public offering plus from offer for sale of some of their shares) from the listing exercise.

They still own 67% of the listed entity, which now has a market capitalisation of just over RM1bil. Not a bad deal for a group that makes affordable sushi that does not even have raw fish in their offerings.

Hot on the heels of Oriental Kopi must be groups like Hock Kee Kopitiam (in which Creador and Censuria Capital have a small stake in) and ZUS Coffee (which is backed by a few private equity firms).

A recent social media post is promoting loss-making Oasis Harvest Corp Bhd simply because it is associated with retail F&B names such as De.Wan 1958, Café Chef Wan, Uncle Don’s and Verona Trattoria.

The company is also planning to roll out a new Kopitiam concept. Many people in F&B are pumped up by the strong interest our market seems to have for the sector.

This week, MTT Shipping and Logistics Bhd, Malaysia’s leading domestic container liner shipping operator, that dominates cabotage routes between Peninsular Malaysia, Sabah, Sarawak and Brunei, went public. Its fleet includes fuel-efficient vessels for shallow riverine ports. The company boasts 25% net profit margins and a return on equity of 18%, recorded in FY25. There are also no new domestic players in the last 10 years or so. Clearly, high entry barriers exist in this business.

Its IPO shares, priced at an undemanding price earnings multiple of a mere 10.3 times its FY24 earnings, tanked on the first day of trading and have remained underwater. At its current price of 98 sen, it is trading at a mere 4 times its FY25 earnings.One reason though is that the company’s profits are correlated with charter rates, which can go up and down. Rising fuel costs could be another dampener.

Another concern is the overall economic situation – when the economy softens, less stuff needs to get shipped around, which could crimp earnings.

But wouldn’t that also impact the earnings of retail F&B players? If its FY25 net profits of RM323.45mil are repeated in FY26, and going by its 50% dividend payout ratio, its share price now will be giving you almost a 7% yield.

Yet, there remains a shortage of takers.

And then there’s the much anticipated listing of chip design company SkyeChip Bhd. How are our investors going to price something so high-tech?

SkyeChip Bhd is a Penang-based fabless integrated circuit (IC) design firm, specialising in cutting-edge silicon intellectual property and IC solutions for artificial intelligence (AI) and high-performance computing.

The company develops products covering full design stages from architecture to physical layout, including Malaysia’s first edge AI processor (MARS1000).

It has filed over 100 patents in Malaysia, China, and the US. Talk about having a high moat.

But is all of that easily understood by investors? Or are Malaysian investors more interested in only buying companies that have businesses they can easily see, patronise and understand?

That would be a very risky approach to investing.

That said, the shares of SkyeChip were highly contested by institutional investors.

Sources say a record number of institutions are being selected as cornerstone investors for this stock, each only getting a small portion of what they are asking for. It is left to be seen what valuation SkyeChip comes to the market at as its prospectus has yet to be launched.

In a March 27 report, BIMB Securities Research pegged a target price of 80 sen for SkyeChip, based on 29 times its profits for the financial year ended March 31, 2025.

This is about the same PE valuation of the sushi maker and the kopitiam operator on Bursa Malaysia.

Does that make any sense? So which is undervalued and which is overvalued or is this just the reality of the capital market?