Is the ECOSHOP IPO Really as Expensive as It Appears?

The retail Bumiputera portion of the ECOSHOP IPO was under-subscribed. The IPO price has been revised downward 6.6% from RM1.21/share to RM1.13/share. 

At the IPO price of RM1.13, could ECOSHOP possibly be valued at approximately 20x FY26 (1 June 2025 – 31 May 2026) earnings, or lower? 

Effective 14 April 2025, prices at its Eco-Shop stores increased from RM2.40 to RM2.60 (+8.3%) in Peninsular Malaysia, and from RM2.60 to RM2.80 (+7.7%) in East Malaysia and Langkawi.

Below are pro-forma income statements reflecting the impact of increased selling prices. 

Scenario (i) assumes an 8% price adjustment across both Eco-Shop and Eco-Plus. 

Scenario (ii) assumes an 8% price adjustment at Eco-Shop only.

	FY2024	FY2024 (i)	FY2024 (ii)
Revenue	2,404,020.00	2,596,341.60	2,577,109.44
Cost of sales	(1,768,510.00)	(1,768,510.00)	(1,768,510.00)
GP	635,510.00	827,831.60	808,599.44
Other income/ expenses	50,796.00	50,796.00	50,796.00
Selling & distribution expenses	(351,040.00)	(351,040.00)	(351,040.00)
Administration expenses	(71,191.00)	(71,191.00)	(71,191.00)
Profit from operations	264,075.00	456,396.60	437,164.44
Finance income	2,504.00	2,504.00	2,504.00
Finance cost	(24,062.00)	(24,062.00)	(24,062.00)
Share of profit in associate	(813.00)	(813.00)	(813.00)
PBT	241,704.00	434,025.60	414,793.44
Taxation	(64,424.00)	(115,685.57)	(110,559.41)
PAT/ PATAMI	177,280.00	318,340.03	304,234.03
Number of shares	5,747,000,000.00
EPS (sen)	3.08	5.54	5.29
Historical PE based on IPO price of RM1.13	36.63	20.40	21.35

These adjustments significantly reduce the historical PE ratio from 36.63x to about 20.40x and 21.35x respectively. While price increases generally risk impacting sales volume, historical data from the last two price hikes shows that sales volumes rebounded within three months, with no prolonged decline.

Eco-shop previously raised prices from RM2.20 to RM2.40 effective 1 June 2022, coinciding with the start of FY23. Following the adjustment, gross margin improved from 19.6% in FY22 to 26.0% in FY23, and has remained above 26.0%. 

The recent RM0.20 price hike in April 2025 is expected to push gross margins above 30%. Is this margin too high?

For comparison, MRDIY’s gross margins were 45.36% in 2023 and 45.8% in 2024.

What about forward PE ratio based on FY26 estimated earnings?

Assuming a low double-digit revenue growth in FY25 and FY26, and factoring in

a) The minimum wage adjustment starting 1 February 2025;

b) A newly introduced 2% EPF contribution for foreign workers;

c) Electricity tariff adjustment in 2H25;

d) Interest saving; and

e) The absence of wages subsidy (FY24:RM5.367m),

… At the IPO price of RM1.13, could ECOSHOP possibly be valued at approximately 20x FY26 (1 June 2025 – 31 May 2026) earnings, or lower?

Other factors to consider include the Renminbi-to-Ringgit exchange rate and freight rates.

Is ECOSHOP still expensive?

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Additional information:

In the FYE 31 May 2024, it rolled out in phases, a new pricing strategy for our Eco-Plus format stores to streamline pricing across various product categories by implementing a fixed price tiering for each product category. It refined such pricing strategy for our Eco-Plus stores starting December 2024 to simplify the pricing structure. Currently, it offers a combination of products in its Eco-Plus stores at a fixed price of either RM2.60, RM6.00 or RM10.00 in Peninsular Malaysia, and either RM2.80, RM6.60 or RM11.00 in East Malaysia. 

DXN – An Underrated Growth Stock?

QL Resources Berhad (QL) needs no introduction within the investment community. It is a darling stock among investors and celebrated its 20^th anniversary as a public listed company in 2020. Over the past 2 decades, QL has achieved remarkable growth, with a compounded annual growth rate (CAGR) of 14.6% in revenue and 12.3% in profit before tax (PBT). Its loyal shareholders have enjoyed an impressive return on investment of 26.1% CAGR over this period.

Meanwhile, DXN Holdings Berhad (DXN), founded in 1993, recently reported a pretax profit of RM479m and a PATAMI (Profit After Tax and Minority Interests) of RM311m in its FY24, which ended in February 2024—31 years after its establishment.

For context, during a similar 31-year period following its inception in 1987, QL recorded a pretax profit of RM255m and a PATAMI of RM206m in FY18.

DXN also boasts a strong net cash position, unlike QL, which operates in a net debt position. Additionally, DXN has a dividend policy of distributing at least 50% of its net profit to shareholders, offering a more attractive dividend yield compared to QL.

Separately, did you know that DXN and Nestlé Malaysia are currently generating similar profits? However, Nestlé’s market capitalisation stands at RM21,297m—approximately 8.2x larger than DXN’s market cap of RM2,592m.

While it's not an exact comparison, the disparity is striking. Adding to this, DXN has a net cash position of RM578m, whereas Nestlé is in a net debt position of RM921m. Furthermore, DXN offers a compelling dividend yield of 7.1%, compared to Nestlé’s lower dividend yield of 2.6%.

Despite its impressive three-decade track record, favorable growth outlook (as stated in the company’s financial reports), and a solid balance sheet, DXN is currently trading at a trailing 12-month price-to-earnings ratio of just 8x. This valuation comes alongside a compelling dividend yield of 7.1%.

Potential factors influencing DXN’s valuation:

a) Stigma around delisted and relisted stocks: Most delisted and subsequently relisted stocks on Bursa Securities trade below their relisting IPO price. However, unlike most of these companies, DXN continues to achieve increasing top-line and bottom-line growth after its relisting.

b) Private jet leasing from a related party. Financial market columnist Pankaj Kumar has shared his views on this related-party transaction, which lead me to believe it is fair and not as negative as the market perceives (https://www.thestar.com.my/business/insight/2024/11/23/getting-related-party-transactions-right)

c)  Multi-level marketing (MLM) business model: It is worth noting that DXN manufactures over 70% of its SKUs in-house. MLM is primarily a distribution channel for its products. In fact, this MLM distribution model has significantly driven its business growth as members continue to multiply. 

d)  Frontier market risks: Operating in developing markets presents significant growth opportunities but also exposes DXN to geopolitical and economic risks.

Beyond stock performance, DXN’s achievements under the leadership of Datuk Lim Siow Jin are noteworthy. The company has grown into Malaysia’s largest MLM firm with a global presence, generating over RM300m in annual net profit. This is a remarkable accomplishment that Malaysians can take pride in.

Moreover, DXN has created jobs, contributed to government revenues, and supported Malaysia’s tourism industry by attracting large numbers of overseas members to Malaysia.

The critical questions remain: Will DXN continue its growth trajectory? And will the market eventually re-rate the stock? Only time will tell.

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Ground Rules for FTSE Bursa Malaysia KLCI Review

At the market close on Monday (25 Nov 2024), the constituents of the FTSE Bursa Malaysia KLCI will be reviewed, with the changes taking effect on 23 December 2024.

Will GAMUDA and the recently listed 99SMART, currently ranked 16th and 24th in terms of market capitalization, be added to the index? Will the bottom two constituents, GENTING and GENM, currently ranked 34th and 37th respectively, be removed from the index?

Below are the key ground rules for the FTSE Bursa Malaysia KLCI:

FTSE Bursa Malaysia KLCI comprises the largest 30 companies by full market capitalisation that meet stated eligibility requirements.

Free Float: Companies with a free float of 15% or below are excluded from the index.

Review dates: The semi-annual review of the FTSE Bursa Malaysia Index Series constituents takes place in June and December using data from the close of business on the Monday four weeks prior to the review effective date.

Effective dates:  Any constituent changes will be implemented after close of business on the third Friday (i.e. effective Monday) of June and December respectively.

Insertion: A security will be inserted at the periodic review if it rises to 25^th or above when the eligible Main Market securities are ranked by full market value.

Deletion: A security will be deleted at the periodic review if it falls to 36^th or below when the eligible Main Market securities are ranked by full market value.

For more details: Ground Rules for FTSE Bursa Malaysia Index Series (October 2024)

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SAB: Still at a discount after discounting its discounted valuation.

At RM3.60 per share, Southern Acids (M) Berhad (KLSE:5134) is valued at RM493m.

The company has been profitable for the past 20 years, except for FY09. Although a constant annual dividend of 5sen/share since FY14 isn’t particularly exciting, it has consistently paid dividends for at least 20 years. Additionally, it boasts a very solid balance sheet with net cash in excess of RM300m.  

SAB operates in 3 core businesses:

1)        oleochemical manufacturing

2)        healthcare services

3)        milling & cultivation.

However, the crown jewel of the group lies in its 260.82ha of freehold land. This land is strategically located between the matured township of Kota Kemuning and ongoing township developments of Bandar Rimbayu (IJM), Eco Sanctuary (Ecoworld), TwentyFive.7 (Gamuda) and Tropicana Aman (Tropicana).

Let’s estimate the net realisable value of SAB’s key assets using sum-of-the-parts method. This calculation excludes other smaller assets such as:

1) a 2.4% stake in listed Paramount Corporation Berhad (RM5.09m based on closing price of RM1.22)

2) An office at Centro Tower with a book value of RM4.37m

3) 3.25 acres of industrial land in Klang with a book value of RM3.32m

4) A corporate office with a book value of RM2.67m.

	Assumptions/ valuation*	Estimated amount* (RM’m)
260.82ha of freehold land at Thangamallay Estate	RM56.44 psf(1)	1,584.65
232-bed Sri Kota Hospital	PE multiple of 20x	(2)477.58
Cash	Excluding minority interests(3)	305.47
Milling and cultivation	PE multiple of 8x, 63% stake	(4)215.64
Oleochemical manufacturing	20% of net asset value  (31 December 2023)	25.61
	TOTAL	2,608.95 (RM19.05/share)

*See appendix

To be realistic, discounts are applied to these assets/ businesses:

 

	Discount	Estimated amount (RM’m)
260.82ha of freehold land at Thangamallay Estate	75% discount (common for property stocks). Also, excluded potential value appreciation from connectivity to West Coast Expressway	396.16
232-bed Sri Kota Hospital	10% discount	429.83
Cash	20% discount	244.38
Milling and cultivation	Discount of 2x PE multiple	161.73
Oleochemical manufacturing	Zero value(5)	0.00
	TOTAL	1,232.10 (RM9.00/share)

Applying a further 20% discount to the overall discounted valuation, we arrive at a total valuation of RM985.68m (RM7.20/share).

Despite this valuation, the share price still reflects a steep discount of approximately 50% after considering the discounted value.

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Appendix

 

(1) Ten year ago, in 2014, Gamuda purchased 104.1ha of leasehold agricultural land nearby for RM392.2m, or RM35 psf, with the intention of developing it into TwentyFive.7 township. (https://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download/?name=EA_GA_Attachments&id=62463)

Assuming the land appreciates at a compounded average growth rate of 3% and applying a 20% premium for freehold land, it arrives at a land price of RM56.44 psf.              

(Leasehold properties typically cost 20% less than a similar freehold property. https://www.iproperty.com.my/guides/freehold-vs-leasehold-title-malaysia-what-property-buyers-should-know-64117) Conversely, freehold properties usually cost 25% more than a comparable leasehold property. When we exclude the building and compare freehold land to leasehold land, logically, the premium should be more than 25%. To be conservative, a premium of 20% is adopted.

(2) To be conservative, we use the lower of FY23 PBT (RM31.42m) and annualised FY24 PBT (9MFY24: RM28.356m). A corporate tax of 24% is applied to estimate the estimated annual net profit.

With a target PE multiple of 20x, this amounts to approximately RM2.06m per bed.

Reference:

Based on IHH’s offer for Ramsay Sime Darby Health Care, which had 1,375 operational beds as at last Tuesday, the joint venture between Ramsay Healthcare Ltd — one of the world’s largest hospital operators — and Sime Darby Bhd was valued at about RM4.12 million, or about US$1 million, per operational bed. (https://theedgemalaysia.com/article/ihhs-offer-ramsay-sime-darby-puts-spotlight-kpjs-undervaluation)

 

(3) 

As of end of FY23 (31 March 2023), the group was in a net cash position of RM383.48m. Since SAB owns a 63% stake in Indonesian subsidiaries, proportionately, 37% of the cash in Indonesian Rupiah is excluded as non-controlling interests.

(4) To be conservative, we use the lower of FY23 PBT (RM74.56m) and annualised FY24 PBT (9MFY24: RM42.79m). A corporate tax of 25% is applied to estimate the estimated annual net profit.

(5) The oleochemical manufacturing division was profitable in FY22. However, it incurred losses in FY23 and 9MFY24. To be conservative, zero value is assigned to the loss-making business.