CNVRG and MONDE: A tale of two mispriced companies

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On the surface, CNVRG and MONDE seem to be very similar companies. Both debuted as the largest IPO of the year upon listing (CNVRG in October 2020 and MONDE in June 2021) and delivered hefty returns to their shareholders within their first year of being listed companies.

CNVRG hit an all-time high of P45.40 per share less than one year after listing, a whopping gain of 170.56% from its IPO price of P16.80. MONDE hit an all-time high of P20.70 per share less than four months after listing, a more modest 53.33% gain from its IPO price of P13.50.

Due to their extraordinary size and liquidity, CNVRG and MONDE were added to the MSCI and FTSE global indices a few months after listing. They were also the first companies to qualify for early inclusion in the benchmark PSEi after the exchange changed its policy to allow companies to be added to the PSEi before their first listing anniversary, as long as they meet the liquidity, market cap, and free float requirements.

This made CNVRG and MONDE the stock market darlings of 2021, but the winds have changed since then and both have been on a persistent downtrend over the past few months.

Analysis and Recommendation

CNVRG: A growth stock being priced as a mature company. The downtrend in CNVRG started when Coherent Cloud Investments B.V., an affiliate of global private equity firm Warburg Pincus and an early investor in CNVRG, announced plans to divest of its 15.83% stake in the company.

The decline was further accelerated when the company’s quarter-on-quarter subscriber count growth for its residential and enterprise businesses slowed to 7% in Q1 2022 and 1% in Q2 2022. This suggested that CNVRG has fully saturated the low-hanging fruits of NCR, Central Luzon, and Southern Luzon, where its fiber infrastructure is well-established.

The company will now have to embark on a more capital-intensive expansion to the under-penetrated areas in Northern Luzon and key markets in Central Visayas, Northern Mindanao, and Davao. In the past month, CNVRG dropped further on speculation that it may be a candidate for removal from the MSCI global index after its market cap dropped by more than 60% since May.

Our View: CNVRG used to be expensive, but the sell-off was overdone. CNVRG ended 2021 with a P/E ratio of 33.5x. Back then, it was an acceptable valuation given that CNVRG was a disruptor company delivering 69.2% revenue growth and 111% net income growth.

It was also not on anyone’s radar that central banks around the world would go on a massive rate hiking spree, which made the market more accepting of high-valued companies. CNVRG is now trading at 10.4x forecasted 2022 earnings, compared to its more mature peers GLO and TEL which are trading at 14.2x and 10.8x respectively.

While GLO and TEL are expected to grow their EPS by an average of 4.0% and 2.6% over the next three years, CNVRG is forecasted to grow an average of 18.5% in the same period. That would give CNVRG a PEG (price-to-earnings growth) ratio of 0.56, which seems to be a steep discount for a company that is nowhere near its peak maturity.

MONDE: A mature company being priced as a growth stock. MONDE chose to market its IPO as an opportunity to buy into the growth story of its UK-based meat alternative business, Quorn Foods, despite the fact that MONDE was known for its market-leading noodles and biscuits business in Asia and Quorn accounted for only 22% of MONDE’s sales.

However, despite dumping a lion’s share of its IPO proceeds on Quorn, the alternative meat maker failed to grow its share in the saturated US market and continued to drag on the MONDE’s profits in 2Q22. Further, Quorn is losing market share in its home market in Europe and the United Kingdom, with more pain expected as the cost of living crisis and fiscal policy problems roil the British economy. MONDE’s mammoth noodles segment also took a hit earlier this year when product recalls in minor markets in Europe triggered a PR catastrophe that the company warns will cause its sales growth for the noodles category to flatline in Q3 2022.

Our View: MONDE was expensive, and remains expensive despite the drop in share price. MONDE ended 2021 with a P/E ratio of 85.3x, mainly due to financing costs from the Arran convertible loan. Considering its core income to exclude these one-off items, MONDE’s 2021 P/E ratio still stood at 35.6x.

Compared to its peers, URC and CNPF, which ended 2021 with P/E ratios of 23.4x and 22.2x, respectively, MONDE seems to be an outlier. Even after the sell-off in recent weeks, MONDE is still trading at 27.6x forecasted 2022 earnings, which is a steep premium to URC’s 22.5x and CNPF’s 17.6x.

Considering that MONDE is expected to grow its earnings by an average of 14% over the next three years (using very optimistic projections), this gives MONDE a PEG ratio of 1.9, which we find to be unacceptable in this economy. On the other hand, URC has a PEG ratio of 1.5 while CNPF is at 1.2. MONDE has lost 30% of its market cap since May, but we expect further downside especially after the company discloses its Q3 earnings early next month.

While rising inflation is worrisome, a revised stock picking strategy can certainly help investors hedge against inflation woes.

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