TL;DR Although revenue is growing, net profits have fallen over the years. A lot of cash is being flushed back into acquisitions and opening of new outlets. Instead of opening so many new brands and restaurants, they should probably focus on getting a few right.
Business Profile
Source: Katrina Group Ltd Annual Report 2018
The business operates a chain of restaurants and cafes under 9 different F&B brands and concepts developed by themselves. Each brands serves authentic cuisines of different ethnicity, namely Indonesian, Thai, Hong Kong, Yunnan,Northern Chinese cuisine, Mexican and Vietnamese. More renowned brands include Bali Thai, So Pho and Streats. They also provide food delivery for these 3 brands, as well as have catering services.
Source: Katrina Group Ltd Annual Report 2018
Currently, they have 45 restaurants in Singapore, 4 restaurants in the Peopleās Republic of China and 1 maiden restaurant in Indonesia. Of the ten brands, 5 are casual dining brands and 5 are mid-ranged dining brands, all strategically located in convenient and high foot traffic locations.
Some Financial Highlights
Source: Katrina Group Ltd Annual Report 2018
Revenue
Source: Katrina Group Ltd Annual Report 2018
Revenue has been growing consistently since 2014, with the biggest percentage increase in revenue in 2015. Much of these increase in revenue had been due to the increase in outlets over the years, as well as the implementation of food delivery services. In fact, food delivery revenue had tripled from 2016 to 2018.
What to me is slightly worrying is how revenue growth for 2018 to 2017 increased mainly from opening of new outlets. In fact, the $6.8m increase in revenue was largely attributed to revenue from new outlets which contributed $5.6m. As I mentioned elsewhere, this may not be the most favourable strategy moving forward.
Cost of Sales
Cost of sales, which comprised mainly food and beverage, employee benefits, utilities, leases of restaurants, online commissions and depreciation of property, plant and equipment increased by S$6.4 million. As expected much of the cost was due to the opening of new outlets and two newly acquired outlets and increase in online sales commission.
Other Expenses
Groupās operating expenses which comprises administrative expenses and selling and distribution expenses, increased by 20.4%. This was mainly due to higher value of fixed assets written off, higher recruitment costs, consultancy fees incurred for acquisition and higher professional fees and salaries in respect of the hospitality business. Even though their foray into the hospitality business generated revenue, significant costs had been incurred.
Net Profit
Source: Katrina Group Ltd Annual Report 2018
Overall, the high operating expense from already runing F&B outlets, plus the costs of opening new outlets and engaging in acquisitions had led the business to have decreasing net profit.
Balance Sheet Strength
Overall, it seems that the firmās balance sheet is okay, with a current ratio of slightly more than one, but with much of current assets being made up of cash and refundable deposits. Much of the short-term financial obligations that the company has are amounts owed to both suppliers of ingredients and other form of inventory, as well as salaries and CPF amounts. The company does not seem to hold much debt, so I do believe that debt issues wouldnāt be a problem.
Cashflow
What is striking about the companyās cashflow from operating activities, is how much depreciation, a non-cash expenses, had reduce the profits of the business. Despite having low profitability, I do believe that the company had still managed to bring in a tidy sum of $4m from operating activities, mainly because of depreciation.
On the other hand, a lot of cash has then been spent out on acquisitions and purchase of property and equipment. In fact, that amount for 2018 is almost equal. This reminds me of the point I had made earlier, that opening of new stores arenāt always that great an idea because there is significant cash outlay as well, and that it would be quite long before the investments can be recouped.
Finally, the company paid out less than half the dividends for the previous year, probably reflecting the need for how much cash the business has been using up.
What the company is planning to do in the futureā¦
Opening of New Outlets
Source: The Edge Singapore
A large part of our F&B business growth this year is expected to be focused on collaborations or acquisitions, especially in overseas markets. They currently have 5 restaurants overseas, 4 of which are in China and another in Indonesia. It seems like as a whole, much of the F&B businesses in Singapore are trying to move overseas, especially China. This is because Singaporeās population is quite limited and F&B competition is very intense.
However, I do have 2 qualms about this. Firstly, I donāt think this growth strategy is working, as shown by how revenue has been increasing but net profit has been dropping. As mentioned, the costs of opening new outlets are very high, such as expenditure on new equipment, consultation fees, training fees etc, not to mention the amount of employee overhead and time needed to facilitate such openings.
Secondly, the company has closed numerous outlets before. For example, they have already closed 2 in Beijing, and have closed and are continuing close several non-performing outlets in Singapore. This shows that this strategy of theirs, doesnāt seem to make much sense either. Moreover, new outlets have a long gestation period before profits can be reaped, so closing them before you break even or you have even recouped your investments means that you made a loss overall.
Food Delivery Services
Source: The Lantern
Management also mentioned that they do plan to focus on growing this vertical as well. As shown, revenue from such food delivery services have grown. I like this strategy because much lesser costs are incurred to supply food delivery services, and they can tap on existing infrastructure and resources to produce food. Although margins for food delivery will be lesser due to fees to the delivery platform and drivers, the low fixed cost means that more profits can be grown from this portion.
What I believe management can doā¦
As a whole, I do believe that management can probably focus on driving same store sales, rather than keep on expanding outlets. One big issue with F&B is that there is a lot of excess capacity during non-peak hours. Perhaps management can come with promotions for students, or to slash prices during lunch hours to attract more lunch time crowd or have some deals during non-peak hours for tea or dessert.
Even though management did not disclose the break down for the different brands, I do believe that some of the brands may be non-performing. Perhaps management can look into streamlining services and brands, and look into improving food quality and finding out what customers want. Although diversifying into so many brands may reduce risk, this can cause a lack of focus on one brand, which is what management may have committed.
TL;DR Although revenue is growing, net profits have fallen over the years. A lot of cash is being flushed back into acquisitions and opening of new outlets. Instead of opening so many new brands and restaurants, they should probably focus on getting a few right.
Business Profile
Source: Katrina Group Ltd Annual Report 2018
The business operates a chain of restaurants and cafes under 9 different F&B brands and concepts developed by themselves. Each brands serves authentic cuisines of different ethnicity, namely Indonesian, Thai, Hong Kong, Yunnan,Northern Chinese cuisine, Mexican and Vietnamese. More renowned brands include Bali Thai, So Pho and Streats. They also provide food delivery for these 3 brands, as well as have catering services.
Source: Katrina Group Ltd Annual Report 2018
Currently, they have 45 restaurants in Singapore, 4 restaurants in the Peopleās Republic of China and 1 maiden restaurant in Indonesia. Of the ten brands, 5 are casual dining brands and 5 are mid-ranged dining brands, all strategically located in convenient and high foot traffic locations.
Some Financial Highlights
Source: Katrina Group Ltd Annual Report 2018
Revenue
Source: Katrina Group Ltd Annual Report 2018
Revenue has been growing consistently since 2014, with the biggest percentage increase in revenue in 2015. Much of these increase in revenue had been due to the increase in outlets over the years, as well as the implementation of food delivery services. In fact, food delivery revenue had tripled from 2016 to 2018.
What to me is slightly worrying is how revenue growth for 2018 to 2017 increased mainly from opening of new outlets. In fact, the $6.8m increase in revenue was largely attributed to revenue from new outlets which contributed $5.6m. As I mentioned elsewhere, this may not be the most favourable strategy moving forward.
Cost of Sales
Cost of sales, which comprised mainly food and beverage, employee benefits, utilities, leases of restaurants, online commissions and depreciation of property, plant and equipment increased by S$6.4 million. As expected much of the cost was due to the opening of new outlets and two newly acquired outlets and increase in online sales commission.
Other Expenses
Groupās operating expenses which comprises administrative expenses and selling and distribution expenses, increased by 20.4%. This was mainly due to higher value of fixed assets written off, higher recruitment costs, consultancy fees incurred for acquisition and higher professional fees and salaries in respect of the hospitality business. Even though their foray into the hospitality business generated revenue, significant costs had been incurred.
Net Profit
Source: Katrina Group Ltd Annual Report 2018
Overall, the high operating expense from already runing F&B outlets, plus the costs of opening new outlets and engaging in acquisitions had led the business to have decreasing net profit.
Balance Sheet Strength
Overall, it seems that the firmās balance sheet is okay, with a current ratio of slightly more than one, but with much of current assets being made up of cash and refundable deposits. Much of the short-term financial obligations that the company has are amounts owed to both suppliers of ingredients and other form of inventory, as well as salaries and CPF amounts. The company does not seem to hold much debt, so I do believe that debt issues wouldnāt be a problem.
Cashflow
What is striking about the companyās cashflow from operating activities, is how much depreciation, a non-cash expenses, had reduce the profits of the business. Despite having low profitability, I do believe that the company had still managed to bring in a tidy sum of $4m from operating activities, mainly because of depreciation.
On the other hand, a lot of cash has then been spent out on acquisitions and purchase of property and equipment. In fact, that amount for 2018 is almost equal. This reminds me of the point I had made earlier, that opening of new stores arenāt always that great an idea because there is significant cash outlay as well, and that it would be quite long before the investments can be recouped.
Finally, the company paid out less than half the dividends for the previous year, probably reflecting the need for how much cash the business has been using up.
What the company is planning to do in the futureā¦
Opening of New Outlets
Source: The Edge Singapore
A large part of our F&B business growth this year is expected to be focused on collaborations or acquisitions, especially in overseas markets. They currently have 5 restaurants overseas, 4 of which are in China and another in Indonesia. It seems like as a whole, much of the F&B businesses in Singapore are trying to move overseas, especially China. This is because Singaporeās population is quite limited and F&B competition is very intense.
However, I do have 2 qualms about this. Firstly, I donāt think this growth strategy is working, as shown by how revenue has been increasing but net profit has been dropping. As mentioned, the costs of opening new outlets are very high, such as expenditure on new equipment, consultation fees, training fees etc, not to mention the amount of employee overhead and time needed to facilitate such openings.
Secondly, the company has closed numerous outlets before. For example, they have already closed 2 in Beijing, and have closed and are continuing close several non-performing outlets in Singapore. This shows that this strategy of theirs, doesnāt seem to make much sense either. Moreover, new outlets have a long gestation period before profits can be reaped, so closing them before you break even or you have even recouped your investments means that you made a loss overall.
Food Delivery Services
Source: The Lantern
Management also mentioned that they do plan to focus on growing this vertical as well. As shown, revenue from such food delivery services have grown. I like this strategy because much lesser costs are incurred to supply food delivery services, and they can tap on existing infrastructure and resources to produce food. Although margins for food delivery will be lesser due to fees to the delivery platform and drivers, the low fixed cost means that more profits can be grown from this portion.
What I believe management can doā¦
As a whole, I do believe that management can probably focus on driving same store sales, rather than keep on expanding outlets. One big issue with F&B is that there is a lot of excess capacity during non-peak hours. Perhaps management can come with promotions for students, or to slash prices during lunch hours to attract more lunch time crowd or have some deals during non-peak hours for tea or dessert.
Even though management did not disclose the break down for the different brands, I do believe that some of the brands may be non-performing. Perhaps management can look into streamlining services and brands, and look into improving food quality and finding out what customers want. Although diversifying into so many brands may reduce risk, this can cause a lack of focus on one brand, which is what management may have committed.