Sky-high valuations as consumer sector booms – but are they justified?

The buying frenzy in Oriental Kopi’s stock has placed it in the same league as the new superstar of retail stocks on Bursa Malaysia – 99 Speed Mart.

THE consumer sector is on a tear, but are the share prices of two newly listed players reaching unsustainable levels?

Oriental Kopi Bhd’s shares, which hit the market on Thursday, doubled up quickly.

By Thursday’s close of 89 sen, it traded at a lofty historical price-to-earnings (PE) ratio of 40 times.

Interestingly, the buying frenzy in Oriental Kopi’s stock has placed it in the same league as the new superstar of retail stocks on Bursa Malaysia – 99 Speed Mart Retail Holdings Bhd.

99 Speed Mart, which went public last September with a historical PE ratio of 34.7 times, also trades at 40 times earnings.

Sure, both companies have great growth stories, but are these stories so amazing that it justifies such high valuations?

No doubt a few analysts have ascribed high valuations to these companies on their growth potential, but when you buy a stock trading at 40 times or even 35 times earnings, that means you’re placing a lot of expectations on its future performance.

The last I checked, there are new kopitiams mushrooming all over the place.

Malaysian consumers are also very trendy, jumping on the latest food fads.

As one fund manager recently put it (pun intended), “Food and beverage (F&B) businesses come with an expiry date.”

He cites the example of Old Town Bhd, which listed in 2011 at a historical PE of 13 times and was privatised seven years later at a PE of 24 times.

Sure, inital public offering investors made a tidy sum, but nowhere near the stellar rise in valuations that the market is ascribing to Oriental Kopi or 99 Speed Mart. It also remains to be seen how much more growth in profits 99 Speed Mart can achieve, considering it already has 2,600 stores across Malaysia and plans to grow by 250 stores annually.

Lastly, if you’re willing to pay such high valuations for F&B stocks, you ought to also consider buying some global F&B companies listed on other markets, which may offer less lofty valuations.