Financial Adviser: 5 Things to Know About 'Coconut King' Romeo Chan's Axelum Resources Corp and How to Profit from It
Amid rising inflation, food stocks are generally considered to be recession hedges because they are able to pass on the additional costs to consumers through higher prices.
But higher interest rates as a result of the rise in inflation also raises risks of food stocks. Higher risks make investors demand higher returns too, which result to lower share prices.
Among the 27 food-related stocks in the market, only three stocks have managed to register positive year-to-date gains.
They are AgriNurture (PSE: ANI), which has the largest gain of +37.75 percent, followed by Jollibee Foods Corp (PSE: JFC) with +7.2 percent, and Victorias Milling Corp (PSE: VMC) with +4.0 percent.
The next four stocks have negative year-to-date returns but managed to outperform the market with single digit loss so far.
These stocks are Universal Robina (PSE: URC), -4.7 percent; Ginebra San Miguel (PSE: GSMI), -5.8 percent; Emperador (PSE: EMI), -5.87 percent and Axelum Resources (PSE: AXLM), -7.0 percent.
AXLM is one of the few stocks in the food and beverage sector that have survived the losses in the stock market, which has declined to date by 13.6 percent.
The stock price of AXLM has fallen by as much as 61 percent to P1.95 per share from its IPO price of P5.00 during the 2020 pandemic.
Although the stock has since recovered to P2.79 per share, it is still far from its long-term value, which makes AXLM a good candidate for value investing.
As a value investor, no matter how low the stock has fallen, it is always wise to get to know the company and its fundamentals. When you understand the business of the company, you will have more confidence in investing in the stock.
Here are the five things every investor needs to know about Axelum Resources and how we can profit from it:
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1| Know the business of the company
Axelum Resources (PSE: AXLM) is the leading global manufacturer of world-class coconut-based food products. It is the largest fully-integrated manufacturer and exporter of premium food-grade coconut products for leading food and beverage companies, confectioneries, bakeries, private label supermarkets and grocery store chains in the country.
AXLM was originally organized as a coconut water company before it expanded its product offerings into dessicated coconut, coconut milk powder, coconut cream, and other coconut-related products in 2016.
The company was founded by the group of Romeo Chan and Henry Raperoga, who have been in the coconut production business for the past 33 years since 1986.
About 48 percent of AXLM’s total sales is contributed by its exports mainly to United States. AXLM’s anchor client, Vita Coco, the world’s largest coconut brand, accounts for about 25 percent of its total sales.
2| Know the earnings outlook of the company
AXLM’s total sales have been growing by a compounded growth rate of nine percent from P3.5 billion in 2016 to P5.3 billion in 2019.
This has translated to a steady 10 percent growth in its net income from P467 million in 2016 to P774 million in 2019.
During the 2020 pandemic, AXLM’s net income declined by 32 percent to P526 million due to lower gross margins and slower total sales turnover.
But last year, with the reopening of the global economy, AXLM’s total sales recovered strongly by 23 percent to P6.3 billion, its highest in five years, while its net income increased by 35.9 percent to P715 million.
This year, AXLM’s total sales for the first six months continued to grow by 8.7 percent to P3.4 billion from P3.1 billion from the same period last year. Its total operating income, however, declined by 6.4 percent to P362 million from P387 million last year due to higher operating expense.
AXLM, nevertheless, was still able to report a 32 percent growth in net income at P420 million from P318 million in 2021 due to foreign exchange gains from its export sales of P155 million.
If we annualize AXLM’s total sales based on its first half results, we can expect total sales to end the year at P6.9 billion.
Given a conservative 11 percent operating income and foreign exchange gain of P200 million, AXLM’s net income this year could reach P798 million, higher than its 2019 pre-pandemic net income of P774 million.
3| Know the financial strength of the company
AXLM has been cutting down on its interest expenses since 2018 by reducing its debt exposure.
Its total interest expenses have significantly declined from a high of P173 million in 2018 to P109 million during its IPO year to only P34 million last year.
This year, AXLM’s total interest expenses for the first six months continued to fall to P13.3 million, down by 11.4 percent from P15 million in the same period last year.
The lower interest expenses reflect AXLM’s strong financial position with debt-to-equity ratio of only seven percent. If we will consider the company’s cash reserve of P1.4 billion, AXLM will be practically debt-free with a negative net debt position.
AXLM’s current assets, which is composed of its cash, receivables and inventory, is 4.15 times bigger than all of its liabilities, current and non-current combined.
This ratio tells us that the company has more than enough cash to pay all its financial obligations.
Now, a strong balance sheet is more than having more assets than liabilities. We need to find if a company’s balance sheet is structured to generate positive cash flows and income in the form of financial returns.
If we compute for the return on invested capital (ROIC) of AXLM, we simply divide its trailing operating income of P791.8 million by its capital employed of P8.4 billion to derive a return of 9.4 percent.
At 9.4 percent return, AXLM is able to generate sufficient income that compensates its investors’ prevailing opportunity cost of 7.5 percent 10-year bond yield plus risk premium.
If we expect AXLM to achieve higher sales this year with better gross margins and lower expenses, it should be able to achieve higher ROIC at 10 percent return.
4| Know the pricing multiples of the stock
If we divide AXLM’s current market capitalization of P10.9 billion by its 12-month trailing income of P817 million, we will derive a Price-to-Earnings (PE) ratio of 12.9 times.
This is relatively low compared to its average PE in 2021 at 16 times. If we price AXLM at last year’s multiple, we should target the stock to appreciate by 24 percent to P3.4 per share.
If we want to play conservative, we can simply get the actual compounded earnings growth rate of AXLM from 2016 to 2022.
Assuming AXLM achieves net income of P798 million this year, we can derive an annual growth rate of 14.3 percent. If we price AXLM based on PE-to-Growth rate (PEG) approach, we project that its fair PE ratio should be 14.3 times.
At 14.3 times, the stock should at minimum be price at P3.04 per share given the current sentiment in the market.
AXLM is also trading at only eight percent premium of its book value of P2.54 per share.
If we price AXLM at its historical Price-to-Book Value of 1.25 times, the stock should be valued at P3.17 per share, which offers 13 percent discount at current price.
5| Know the intrinsic value of the stock
Legendary investor Benjamin Graham wrote in his book The Intelligent Investor that the future value of an investment is a function of its present price. The higher the price you pay, the lower your return will be.
Graham suggested that a way to play defensive was to buy stocks that are priced below their intrinsic values. He said the fundamental value of a stock can be computed by taking the square root of the product of a stock’s PE ratio, price-to-book value (PBV) ratio, earnings per share (EPS) and book value per share (BVS).
But he also suggested that one must not pay a stock more than 15 times its earnings and 1.5 times its book value, so that the maximum factor used in the estimate should be 22.5 (e.g. 15 x 1.5).
If we use the Graham number on AXLM by multiplying 22.5 against the product of its book value of P2.54 per share and its 12-month trailing Earnings Per Share (EPS) of P0.21, we will derive a total amount of 12.02.
If we will get the square root of 12.02 as instructed by Graham, we will derive an intrinsic value for AXLM at P3.46 per share.
At P3.46 per share, the current share price of AXLM offers potential upside of 25.8 percent.
Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice [email protected] or follow him on Twitter @henryong888
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