Singaporeans love to eat and Chilli Crabs are one of our favourite dishes.
No, we are not turning drwealth.com into a food blog.
Instead, the purpose of this article is to share my thoughts about the No Signboard’s Initial Public Offering (IPO) that is going to happen on 30 Nov 2017.
I will be comparing Jumbo and No Signboard since they are both listed on the SGX and they have similar businesses. Let’s dive into it!
Who Serves Better Crabs?
Fun Fact: most people are probably not aware that Jumbo was not the first to introduce the Chilli Crab dish. Roland Restaurant has openly stated that they are the founder of the Chilli Crab in 1956.
I believe each restaurant has its supporters.
This section may stir up some debate, but let’s focus on the
Who is more Profitable?
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 generates cash, it would be appropriate to use the Profitability Factor to evaluate it.
Step 1: Compare Gross Profitability
I have tabulated the financial figures below, but it is important to note that No Signboard has only 9 months of reported results thus far. Hence, I simply annualised its figures by extrapolating 3 more months. Hence, these figures are estimates and the actual results may differ greatly.
|No Signboard (extrapolated by annualising 9 months results)||Jumbo (unaudited results as of 30 Sep 2017)|
Table 1: Gross Profitability of Jumbo vs No Signboard
Jumbo beats No Signboard in revenue by almost 7 times, signalling the large market share held by Jumbo.
Both companies have high Gross Profitability, which is common for the F&B industry. However, Jumbo’s Gross Profitability of 110% is significantly higher than No Signboard’s 77%.
We can infer two things from the numbers in the table.
- No Signboard has a higher Gross Profit Margin which means that their raw material costs are lower than that of Jumbo.
- Jumbo is more efficient when it comes to using its assets to generate revenue and profits.
Putting the two together, we can infer that Jumbo achieved higher Gross Profitability by using less assets rather than rely on the cost savings of raw materials.
Gross Profitability: Jumbo wins
Step 2: Determine Dividend Yield
Since F&B businesses tend to generate cash, they should be able to give dividends. In fact, they really do.
Jumbo has announced a special dividend for FY17, totalling its dividend per share (DPS) to 1.7c. Based on Jumbo’s share price of $0.575, its dividend yield would be 3%.
A 3% yield is not impressive considering that there are higher yielding counters available.
No Signboard has not been listed yet, hence it has no history of dividend distribution as a public company.
But we can guesstimate.
I extrapolated the earnings per share (EPS) to an annual figure of 1.49c.
No Signboard management has declared to distribute at least 30% of the earnings as dividends in the first two years of listing. Hence, the prospective DPS would be 0.45c
Based on the offer price of $0.28, the prospective dividend yield would be 1.6%. Hardly appetising.
Dividend Yield: Both not attractive
Are their dividends sustainable?
There are two ways to determine the sustainability of dividends.
Jumbo paid out 50% and 70% of its earnings as dividends in the past two years. A payout ratio which is less than 100% is deemed as sustainable. I believe No Signboard would abide to this principle in the future too.
As earnings may not be all cash, it is important to check if the companies are able to generate sufficient cash to meet the dividend payouts.
One of the most stringent ways is to use free cash flow (FCF) as a measure of cash generating ability.
As FCF can be highly irregular from year to year, we would take an average as much as possible.
The average FCF yield for Jumbo and No Signboard is 2.5% and 3.1% respectively.
You will notice that the Jumbo’s FCF yield (2.5%) is lower than its dividend yield (3%). This isn’t a good sign, as it poses some questions as to whether the dividend would be reduced in the future. But Jumbo may also slow down its expansion thus incurring less capital expenditure such that more cash flow could be freed up for dividends. This remains an unknown.
I would not expect No Signboard to have very high FCF since it is also undergoing expansion.
Sustainability of Dividends: Could be compromised due to business expansions
Who has a greater growth potential?
It is good that both have expansion aspirations, as it means higher potential gains for investors in the future if it turns out well. However I am usually wary of expansions, especially geographically, as the foreign palate could be very different from Singaporeans.
That said, Jumbo had stuck its feet in China. The revenue contributed from China has almost doubled from a year ago, and is now responsible for 17% of the total revenue of Jumbo. It would be promising if they can grow their presence in China.
Besides geographical expansion, Jumbo has also expanded into other F&B brands. I must say I am a fan of Ng Ah Sio Bak Kut Teh which is one of their subsidiaries acquired years ago. Jumbo group of companies also include JPot, Chui Huay Lim Teochew Cuisince, JCafe, Jumbo Catering and Singapore Seafood Republic.
No Signboard has also ventured into ready-to-eat vending machines under the Mama Shop brand in April 2017. This business model is not proven in Singapore, but it seems like a trend as more vending machines popped up around the Island. I understand that the young Singapore families are less likely to cook and would prefer convenience to satisfy their hunger. However, there are close substitutes such as delivery services from Food Panda, UberEats and Deliveroo.
No Signboard also just acquired the Denmark Draft brewery in Aug 2017. I believe they will be serving this beer in all No Signboard restaurants. Complementary nonetheless.
It seems No Signboard’s expansion pace has picked up in 2017 and going unabated after the IPO.
The management has announced that about half of the IPO proceeds has been earmarked to develop the beer business. About 24% of the proceeds would be used to establish a new chain of casual dining restaurants. A smaller portion will be used to grow the number of ready-to-eat vending machines in Singapore.
No Signboard’s plans for IPO Proceeds
My view is that Jumbo’s focus on restaurant operations would be better than No Signboard’s diversified approach – to beer and vending machines.
I believe the expertise to run a beer brand is different from that of a restaurant and likewise for the vending machines. A beer brand would also require a huge amount of marketing budget to win some market share from established incumbents.
Moreover, I think Jumbo’s foray into the China market is a lot more scaleable, if successful. Most importantly, Jumbo is focused on growing its core brand – Jumbo Seafood. The crabs that made them famous. No Signboard didn’t mention anything about their crab business.
Growth Prospects: Jumbo wins
Jumbo seems to be a better choice when we pit it against No Signboard. Not just by the numbers but also the growth prospects. That said, I do not think Jumbo is trading at an attractive price now and the dividend yield isn’t enticing at all.
How about you? Whose crabs do you prefer?
I do not have any position on either Jumbo or No Signboard. 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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