Coco-nuts over Axelum’s listing

Two companies will be conducting their initial public offering soon: Axelum Resources and All Home.

Axelum Resources (AXLM) will begin offering tomorrow, Sept. 24, until Sept. 30. The target listing date is on Oct. 7.

AXLM is the largest exporter and only vertically integrated manufacturer of high-quality coconut products in the Philippines. AXLM’s products include coconut water, desiccated coconut, coconut cream and coconut milk powder. Although AXLM has its own brands of coconut products (ex. Fiesta), it is predominantly a manufacturer of coconut products for other brands such as Vita Coco. Moreover, around 88 percent of its revenues in 2018 came from the export and distribution of products in the US, Canada, Australia and New Zealand.

The outlook for AXLM is very attractive. Demand for coconut products is growing at a rapid pace given the health and wellness trend and the coconut’s favorable qualities that make it a healthier alternative to other types of food products. Based on a study conducted by the University of Asia and the Pacific’s Center for Food and Agribusiness, Philippine coconut exports are projected to grow by 8-10 percent annually over the next five years, with exports of desiccated coconut and coconut water, which account for 80 percent of AXLM’s revenues, projected to grow by 8.6 percent and 12-20 percent, respectively.

While there are numerous exporters of coconut products, AXLM’s dominant size and vertically integrated nature provides it with a cost advantage over its other competitors. For example, AXLM is Vita Coco’s second largest contract manufacturer, accounting for 18 percent of its total water sales. While other manufacturers of coconut water throw away the rest of the coconut, AXLM processes the coconut meat while the shell and parings are processed into other useful items, providing the company with higher revenues and margins.

AXLM also boasts of a total of 30 quality certifications, including an ISO certification, which is a testament to the company’s commitment to quality and world-class manufacturing standards. Coupled with its cost advantage, AXLM’s ability to get new customers while maintaining customer loyalty is much stronger compared to its competitors. Besides Vita Coco, AXLM’s customers include Unilever, Kraft, General Mills, Cadbury and Hershey’s.

Finally, AXLM’s listing should help boost the company’s future earnings growth. AXLM plans to use around 35 percent of IPO proceeds to upgrade and expand its manufacturing facilities, while it plans to use 10 percent to expand its distribution network locally and internationally.

AXLM still has some low hanging fruits. For example, more than 30 percent of coconut water still goes to waste while its production facilities are operating at only 60-70 percent capacity. By upgrading its manufacturing facilities, AXLM can produce other types of products such as coconut water in one-liter packs and coconut based special-diet products. Coupled with a larger distribution network, AXLM’s ability to market to new customers should improve, helping grow sales and margins.

The main risk facing AXLM is execution risk. At its IPO price of P5.00 per share, AXLM is valued at around 20X price to earnings (P/E) ratio, which is on a par with other listed B2B companies that belong to the food ingredient industry. This is based on the assumption that AXLM’s recurring profits would grow by a compounded annual growth rate of more than 30 percent from 2018 to around P1 billion in 2020, driven by a combination of higher sales volume, margin improvement and lower interest expenses due to debt repayment.

Although AXLM’s valuation can be justified by its above average growth prospects, the stock could underperform the market assuming that it fails to deliver the double-digit earnings growth that investors are anticipating.