(Stocks Discussion) SGX: Singapore Kitchen Equipment Limited (SGX: 5WG)?

Ticker: SGX:5WG

Industry: Machinery

TL;DR

In FY2018, Singapore Kitchen Equipment Limited revenue grew by 9% due to higher sales. However, net profit dipped by more than 45% which is worrying. This is due to higher costs and dual listing on the Hong Kong market which was unsuccessful.

Business Overview

Most of us are familiar with these notable brands:

But do you know that their kitchens are supported by Singapore Kitchen Equipment Limited (SKE)?

SKE, headquartered in Singapore, is a leading commercial & industrial kitchen solutions provider for the F&B and hospitality services industries internationally. They operate through 2 key business segments: Fabrication & Distribution Segment and Maintenance & Servicing Segment. The Fabrication & Distribution Segment manufactures and sells standard and customized kitchen products & systems, while the Maintenance & Servicing Segment provides kitchen equipment maintenance and technical servicing.

To be honest, I was surprised to find out that this company has such a good clientele.

Share Price Performance

Source: TradingView

For the last year, the share price of SKE has declined by 87%. Over the last 5 years, SKE’s stock price has mostly not outperformed the STI.

Financials

Income Statement

SKE’s revenue grew by 9% in 2018, mainly due to more mid-sized and large-sized projects in both private & public sectors with higher sales generated by the Fabrication & Distribution Segment. However, net profit dipped by more than 45%, attributed to an increase in cost of materials, staff costs and overheads, as well as expenses to dual list on the Hong Kong’s Growth Enterprise Market. Just last month, their HK-listing bid was rejected, but the Group intends to appeal against the decision. The company believes that the dual listing is pivotal to build their brand image and tap on capital markets for future growth. Balance Sheet

The business seems to possess strong short-term liquidity as shown by a high current ratio of 2.52. However, they have a high cash balance forming half of their current assets, which may be better utilized for other aspects of business development rather than holding the cash which will not generate much returns.

Overall, the debt metrics of the company is good. It has a low net debt/equity ratio of -0.30 which means that SKE has been conservative in financing its growth with debt and keeping interest expense low. Half of the company’s debt are trust receipts due in less than a year and the other half are finance leases with a term ranging from 3 to 10 years.

Cash Flow Statement

Cashflow worsened in 2018 as financing activities increased significantly to repay bank borrowings. Free cashflow as % of sales has also deteriorated. Their dividend payout ratio increased substantially from 2017, where their dividend payout is greater than net profits, which I would think is quite unsustainable.

Efficiency Metrics

SKE looks quite inefficient as seen from the different metrics used. The figures have also worsened since 2016. However, they have a high reinvestment % of 53%.

Valuation

From the above figures, it seems that SKE is overvalued. Their P/E ratio is high at 26.67, which means investors have to pay quite abit for $1 of earnings. The NOPAT margin is also pretty low at 2.27%, where the company is unable to generate much after-tax operating profit for every dollar of sales made. Therefore, SKE does not seem to be generating much value for its shareholders. Personally, I also find their reasons to dual list not substantial enough, and they should continue to focus on lowering costs and expand into overseas markets to grow net profits. However, one upside is their ability to ride on new malls coming up in 2019 like Funan and the recently opened Jewel Changi Airport. But other than that, this stock would be a pass for me.