Inelastic demand of consumer staples helps Hanwell maintain consistent performance
Boardroom manoeuvrings aside, how does Hanwell Holdings fare from an investment angle? Unlike companies in other sectors trying hard to find a technology angle so as to make themselves more appealing as a growth play, Hanwell’s businesses are decidedly basic.
The company can classify its business into two main segments. The first is a clutch of subsidiaries that form its consumer essentials segment. It is a key player in this market, supplying notable household brands such as Royal Umbrella rice, Golden Peony rice, Beautex tissue paper and Fortune tofu.
Hanwell’s packaging business segment is through its 64% investment in SGX-listed Tat Seng Packaging Group. Tat Seng’s business involves the manufacture and sale of corrugated paper products and other packaging products mainly in China and Singapore.
Consumer staples are generally characterised by the inelasticity of demand for their products, and as an investment, are generally less volatile. In other words, investments in consumer staples are safer because less volatility denotes more predictability, or more room for investors to react to a market shock involving the demand and supply of the products related to the business.
The daily three-year beta, which measures the volatility of stocks against the benchmark stock index, of Hanwell and Tat Seng are 0.87 and 0.57 respectively, denoting that it is 13% and 43% less volatile than the Straits Times Index. Over the same three years, the STI returned –0.5% with dividends reinvested, while Hanwell and Tat Seng returned positive 150.0% and 14.5% respectively.
Markets have been fearful given the impact of Covid-19, though recovering, benchmark stock indices are well outperformed by consumer staple counters such as Hanwell Holdings, which could be a reason to be part of investors portfolio seeking stocks with less volatility with market shocks.
Hanwell’s financial performance has been largely consistent over the past few years, given the nature of its business. The company recorded positive adjusted net income for the past five years along with positive operating cash flow, reflecting good business profitability.
Additionally, the ROE and returns on assets (ROA) for the company has grown from 2.2% to 8.0% and 1.3% to 4.4% respectively over the past five years. The company’s margins, which reflect the moat of its business, or in other words, the strength of its comparative advantage to peers, has also grown in this period from 1.4% to 4.7% for its net income margins.
In our view, consumer staples such as rice and tofu, which are some of the key products of Hanwell’s business have inelastic demand not just because they are required for frequent consumption, but also because consumers tend to have preferences for brands. Brands for frequently purchased products, such as rice, have stickier demand, and as long there are no major shocks to the supply of these products, Hanwell should be able to maintain its consistent performance over the years for this business segment.
Hanwell’s financial health is good, and it is important for investors to assess the balance sheet quality to ensure the safety of their investments. The company’s cash ratio and current ratio are 1.3 and 2.7 times respectively, well above the benchmark of 1 and reflecting good short-term liquidity.
In terms of solvency, the company is in a net cash position, and its cash and cash equivalents alone are enough to cover 99% of the total liabilities. Further, the debt-to-equity ratio is 0.28 times, while the interest coverage ratio is a comfortable 17.5 times.
Yields-wise, Hanwell is attractive with an earnings yield, operating cash flow yield and free cash flow yield of 8.7%, 25.4% and 13.0% respectively. These yields dwarf the risk-free-rate of 1.6%, which is the Singapore 10-year bond yield. The risk-free rate is however comparable to the company’s dividend yield of 1.1%.
Compared to its regional peers, Hanwell is very attractive as it trades at a discount to its competitors for its P/E, P/B and EV/Ebitda. Chart 1 illustrates this and denotes that Hanwell is lucrative compared to similar companies in the same business regionally.