I used to be a foodie jumping from cafe to cafe – known as cafe-hopping – when I was young.
However, as I stepped into the workforce and started a family, I literally had no more time for that. Instead, I now patronise different kinds of restaurants situated in various shopping malls.
Although I missed the leisure times where me and my girlfriend (now wife) would spend an entire afternoon sipping coffee in a new cafe, I gained something important in return...
...the opportunity to do some “food-tasting” in the restaurants of various listed companies such as Swensens’ by ABR Holdings and Din Tai Fung by BreadTalk Group.
With that, I am very excited to do some digging on how the restaurant companies have performed.
In this article, we're going to take a look at 3 of the restaurant brands with what we term "brand recall" or the ability for the average consumer on the street to remember its name. We will then assess them for investment opportunities .
A Quick Look into Singapore’s Restaurant Industry
According to the latest Sep 2018 report from Department of Statistics Singapore, the total sales volume of food and beverage services in Sep 2018 was estimated at $704 million, higher than the $695 million in Sep 2017.
Not surprisingly, the “Restaurants” segment experienced a higher 4.0% increase of sales compared to the previous year. This is probably attributed to a busy lifestyle and higher disposable income of Singaporeans these days.
As the trend of eating out continues, it has led to a wave of many F&B operators being listed in the Singapore Stock Exchange (SGX).
However, restaurant companies in Singapore operate in a notoriously challenging industry due to 3 main reasons:
- Escalating Rental and Labour costs
- Cutthroat competition within a same area i.e. shopping mall
- Ever-changing tastes from fickle eaters
Which are the F&B companies that have managed their costs well while paying shareholders decent dividends?
Below, I have done up a simple table depicting the companies, their various restaurant brands and financial metrics.
|Company Name||Code||Restaurant Brands (include Franchises)||P/E Ratio||Dividend Yield||Profit Margin||Debt/Equity|
|Old Chang Kee Ltd.||5ML||Curry Times||19.88||3.87%|| |
|ABR Holdings Limited||533||Swensen's, Earle Swensen's, Season Cafe||37.89||3.16%|| |
|BreadTalk Group Limited||CTN||Din Tai Fung, Song Fa Bak Kut Teh, FoodRepublic||41.64||1.73%|| |
|Japan Foods Holding Ltd.||5OI||Ajisen Ramen, Menya Musashi, Fruit Paradise||15.57||4.67%|| |
|Jumbo Group Limited||42R||Jumbo Seafood, Jpot, Tsui Wah Cafe||24.19||2.44%|| |
|Katrina Group Ltd.||1A0||Bali Thai, Streats, So Pho, IndoBox||56.53||1.44%|| |
|Kimly Limited||1D0||Kimly Coffee Shops||15.39||3.31%|| |
|Koufu Group Limited||VL6||Koufu Food Courts, Elemen, 1983 Coffee & Toast||12.75||1.56%|| |
|No Signboard Holdings Ltd.||1G6||Hotels, Restaurants and Leisure||15.12||1.65%||16.50%||0.10|
|RE&S Holdings Limited||1G1||Ichiban Sushi, Men-ichi, Kuishin-Bo, Kuriya Dining||18.36||2.16%|| |
|Soup Restaurant Group Limited||5KI||Soup Restaurant||14.62||3.55%|| |
|Tung Lok Restaurants (2000) Ltd||540||Lao Beijing, Slappy Cakes, Ruyi - Chinese Fast Food||-||-||-0.38%||0.16|
|Neo Group Limited||5UJ||Umi-Sushi||13.71||0.0225|| |
A quick glance from the table above allow us to deduce a few things:
- The F&B industry is pretty insulated and viewed as ‘defensive’ given that their P/E ratios are largely above 12x P/E ratio. The average P/E of 23.8x is being dragged up by outliers like Katrina, ABR and BreadTalk which have lofty ratios above 37x.
- F&B operators are generally profitable and able to dish out some tasty dividends too. That said, they usually have low profit margins below 10%, attributable to the reasons i highlighted previously.
- Apart from BreadTalk and Neo Group, the remaining restaurant companies possess strong financial positions with their low debt-to-equity ratios.
Which Restaurant Stock is the Most Appealing
After touching base on the restaurant industry, I believe what readers really want to know is which restaurant stock they should look out for.
As such, I decided to cherry pick 3 stocks that have the best brand recall for the particular cuisines they are well known for:
- Jumbo Group (Jumbo Seafood) – Chilli Crabs
- ABR Holdings (Swensens) – Western cuisine
- RE&S Group (Ichiban Sushi) – Japan cuisine
After all, foodies will agree with me that a strong brand recall (like Hai Di Llao) essentially results in more customers and in turn, higher profits for the companies.
Introducing The Profitability Factor
Dr Wealth embraces the Factor-Based Investing framework which allows us to invest in stocks exhibiting scientifically proven market-beating factors. We have 3 systematic strategies that can be used to analyse stocks.
As Food and Beverage (F&B) businesses are asset-light and generate cash, it would be appropriate to use the Profitability Factor strategy to evaluate it. Let’s get right into it!
Step 1: Compare Gross Profitability
Jumbo (SGX: 42R)
ABR (SGX: 533)
Full Year Sep 2018
Trailing 12M Sep 2018
Full Year Jun 2018
Table 1: Gross Profitability of Jumbo vs ABR vs RE&S; Figures in SGD ’000
Based on the figures above, Jumbo wins hands down against both ABR and RE&S with a gross profitability (gross profits divided by total assets) of 109%.
We can infer two things from the numbers in the table:
- Jumbo commands a relatively higher Gross Profit Margin of 63% versus 43% and 39% for ABR and RE&S respectively. This means that Jumbo’s raw material costs are the lowest among the three (crabs are cheaper than Japanese food?).
- Jumbo is also more efficient when it comes to using its assets to generate revenue and profits. I believe the main reason is because Jumbo restaurants are usually not situated in shopping malls, which means that they need to spend lesser on the assets as compared.
With that, Jumbo secured the top spot for the gross profitability test.
Gross Profitability: Jumbo wins
Step 2: Determine Dividend Yield
F&B businesses are deemed to be cash generators because they collect the cash upfront from customers and can choose to push back trade payables. As such, they should be able to give dividends. In this section, we dive in and look at the 3 companies’ dividend yields and pay-out ratios.
- Jumbo has given a 1.2 cents dividend for FY18. Based on Jumbo’s share price of $0.405 on 21 November 2018, its dividend yield would be 2.96%. Its payout ratio has stepped up from 43% to 70% in FY2018.
- ABR dished out a 2.5 cents dividend for trailing 12m Sep 2018. Based on ABR’s share price of $0.79 on 21 November 2018, its dividend yield comes up to 3.16%. Its payout ratio has increased steadily from 66% in FY2015 to 120% in FY2018. This may mean that ABR will cut its dividends some day, like what Starhub did a few months back.
- Lastly, RE&S offered a 0.4 cents dividend for FY18. Based on RE&S’ share price of $0.185 on 21 November 2018, its dividend yield would be 2.16%. Its current payout ratio stands at 40% in FY2018.
Payout ratio is indicative of how much is being paid outwards via dividends to shareholders in comparison to the price of a company's shares. A payout ratio of less than 100% is sustainable because that means the company is retaining some amount of its profits to help expand the business and it isn't paying out more money than it is making - which in the long run will bankrupt the company.
In a nutshell, while ABR pays out the highest dividend yields, it has an unsustainable dividend payout rate and cannot continue to do so. ABR stock price will probably backslide on the back of reduced dividends and could result in a erosion of invested capital for shareholders. In the meantime, Jumbo has displayed strong earnings and modest but sustainable dividend payouts at 3%, which is why I would be more inclined to declare Jumbo the overall winner of the group.
Dividend Yield: Jumbo Group
Who has greater growth potential?
Beyond comparing profitability and dividend payout numbers, its crucial we examine a company's growth prospects as well.
First up, we have Jumbo – personally, I feel that they have done pretty well through their 3-prong approach:
- Acquiring or expanding to other F&B brands such as Ng Ah Sio Bak Kut Teh, JPot and Tsui Wah cafe
- Ventured into China which has a much larger addressable market
- Grew its franchising model throughout Asia – it has sprung up in Vietnam, Taiwan, Greater China, Fuzhou city etc.
In its latest news release, Jumbo revealed its aim to open 2 new Jumbo Seafood restaurants, 1 Teochew cuisine outlet and 2 new Tsui Wah outlets in Singapore in the next 12 months.
Jumbo also announced ambitious plans to open five to six new franchise outlets each year, targeting Shenzhen, other mainland cities, South Korea, Hong Kong, Macau and Indonesia. I foresee that Jumbo has bright prospects ahead if they can execute their plans properly in the future.
Second, we dived into ABR Holdings. A quick background for those who don’t know ABR Holdings, the company is one of the market leaders in the western casual dining category with over 25 Swensen’s restaurants in Singapore. It also owns other brands like Yogen Fruz, Tip Top and Season’s Café etc.
According to its FY2017 annual report, ABR has acquired an 80% stake in Chilli Padi Holding Pte Ltd to move into the food catering business and broaden its existing F&B selections. In addition, ABR embarked on a maiden foray into property through its investments in 2 property-related businesses in Malaysia.
In my own view, ABR has leveraged on its mainstay Swensen’s brand but not really made any significant inroads into other brands. A move into property could be a double-edged sword given that ABR can stand to gain or lose a lot depending on how the property development turns out. Given a rising interest rate environment, I have a lukewarm opinion on ABR’s land purchases.
Lastly, we have RE&S Holdings on the plate. If it doesn't ring a bell, just remember that it developed famous brands and concepts like Kuriya, Shimbashi Soba, Kuishin Bo and Ichiban Boshi.
The growth direction of RE&S is straightforward – to open new Ichiban Boshi and Ichiban Sushi outlets. On top of that, the management has shifted the focus to their Quick-Service Restaurants, Convenience & Others (“QSR”) segment amid labour crunch issues plaguing the local F&B sector.
I believe that Jumbo has emerged as the clear winner here. From its foray overseas and horizontal expansion into more brands, Jumbo has a long runway of growth ahead backed by good profitability and modest, sustainable dividend payouts.
Growth Prospects: Jumbo wins
Jumbo Group was crowned the winner in all 3 sections (Gross Profitability, Dividend Yield & Growth Prospects) when pitted against the other 2 restaurant operators – ABR Holdings and RE&S Holdings.
In addition, Jumbo has a slightly edge against the other restaurants listed here (after being parsed through brand recall) in that it operates primarily in non-retail outlet areas instead of malls which arguably lowers overall rental costs, while allowing it to retain bigger percentages of profits. Assuming it retains its current business model, it would have been an attractive buy.
But, never forget that we want to be able to purchase shares at a reasonable price, because overly-inflated share prices will eventually revert to the mean (or true value of the company's worth) over time, and so will companies with shares that are underpriced.
As of writing, Jumbo is still trading at 24x P/E ratio even after a 40% drop in share price. In addition, Jumbo’s profits were down 29% year-on-year due to a “gestation period” of their expansion.
Investors who like the business can consider putting it on the watchlist and wait to see if the financials will improve from the increase in franchise outlets.
Laymen Lesson Note: If you are willing to buy the stock now, then you are indicating that you are willing to pay $24 per $1 of current earnings. Note that the $1 is the current earnings of the company and that the $24 is what you're willing to pay as of now if you buy the stock.
The $1 indicated is NOT the current dividend payout.
Even assuming it was, and since Jumbo pays out dividends 3 times a year, it would still take an approximate 8 years for you to gain 100% of your money invested back via dividends (without accounting for inflation). This is, in our opinion, too long of a time to hold a stock.
At Dr Wealth, we generally avoid holding onto positions in stock for longer than 3 years due to the statistically supported event that substantially undervalued stocks (which is what we want to purchase!) typically take 1.5-2.5 years to correct itself and match its actual price or more (at which point we take profit from capital gains + dividend income). You can find out more about Factor Based Investing as a strategy and the peer-reviewed, scientific data that guides it here. Or check our workshop over here.
Disclaimer: I do not have any position on the restaurant operators mentioned above. The above is an opinion of mine and I have no intention to induce anyone to invest. You are responsible for your own investment decisions.
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