(Stocks Discussion) SGX: Soup Restaurant (SGX: 5KI)? - Seedly
Seedly logo
Seedly logo
 

Stocks Discussion

Investments

Anonymous

Asked on 23 Apr 2019

(Stocks Discussion) SGX: Soup Restaurant (SGX: 5KI)?

Discuss anything about share price, dividends, yield, ratios, fundamentals, technical analysis and if you would buy or sell this stock on the SGX Singapore markets. Do take note that the answers given by our members are just your opinions, so please do your own due diligence before making an investment!

0 comments

1 answer

Answer Now

Answers (1)

Sort By

Isaac Chan
Isaac Chan, Business at NUS
Level 8. Wizard
Updated on 23 Apr 2019

One way to estimate how much a share is worth, is to compare the valuation of similar other companies with what other shares are trading at. If shares are undervalued, this could mean that share prices may rise in the future and vice-versa.

Over here, I have grouped together 5 restaurants including Soup Restaurant itself. By looking at P/E, P/S and P/B ratio, the share seem fairly valued, despite P/B being slightly higher than the average and median. I selected these few companies because I believe they represent more upmarket F&B offerings serving more Asian flavours, with similar enough business profiles.

However, I would add that this data might be biased towards P/E ratio, because Tung Lok had a negative EPS. Hence, P/E ratio should be lesser than the current average of 23X. One way to estimate how much a share is worth, is to compare the valuation of similar other companies with what other shares are trading at. If shares are undervalued, this could mean that share prices may rise in the future and vice-versa.

Over here, I have grouped together 5 restaurants including Soup Restaurant itself. By looking at P/E, P/S and P/B ratio, the share seem fairly valued, despite P/B being slightly higher than the average and median. I selected these few companies because I believe they represent more upmarket F&B offerings serving more Asian flavours, with similar enough business profiles.

However, I would add that this data might be biased towards P/E ratio, because Tung Lok had a negative EPS. Hence, P/E ratio should be lesser than the current average of 23X. One way to estimate how much a share is worth, is to compare the valuation of similar other companies with what other shares are trading at. If shares are undervalued, this could mean that share prices may rise in the future and vice-versa.

Over here, I have grouped together 5 restaurants including Soup Restaurant itself. By looking at P/E, P/S and P/B ratio, the share seem fairly valued, despite P/B being slightly higher than the average and median. I selected these few companies because I believe they represent more upmarket F&B offerings serving more Asian flavours, with similar enough business profiles.

However, I would add that this data might be biased towards P/E ratio, because Tung Lok had a negative EPS. Hence, P/E ratio should be lesser than the current average of 23X. TL;DR The firm has strong balance sheet and cashflow health. The brand is well known and is looking to expand more outlets, which might lead to further growth.

Business Profile

Here’s another F&B business profile that could be considered as well! Soup Restaurant is also another popular brand name in Singapore, but other than Soup Restaurant, they also have Teahouse and Cafe O under their brand. However, their soup restaurant chains mostly dominates the outlets that they have. They also have a few branches in Indonesia and Malaysia.

Interestingly, Soup Restaurant is famous for their Samsui Ginger Chicken, a dish originally only consumed by Samsui women once a year during CNY. Apparently, reviews for this dish has been quite good! But sadly I haven’t tried it before.

Future Outlook

Opening of New Outlets

As mentioned in their annual report, the company is looking to expand their outlets both in Singapore and overseas cautiously. They will have one new outlet in Jewel and a revamped outlet at Suntec City.

This should be a strong driver of revenue growth because many Singaporeans are already familiar with the brand, and increasing outlets over the island should lead to higher footfall and more customers.

However, I would like to also perhaps see greater strategic growth into food delivery services as well. Such services can help increase revenue without increasing associated costs. For example, rent and equipment expenditures would not have to increase proportionately. This should lead to improved profitability. Furthermore, with an increased number of outlets islandwide, it would be easier for food to be delivered to customer’s door steps.

Apart from local growth, I do believe more attention could be focused overseas as well. This will reduce the amount of risk and exposure to the Singapore F&B market, and diversify their revenue streams. Additionally, F&B markets have limited growth as I explained as well.

Perhaps greater exposure to Malaysia and China, with predominantly Chinese population might work. Other F&B outlets like Jumbo and Japan Food Holdings have also put more attention to overseas markets.

Improved Productivity

The group also hopes to improve productivity through improving distribution networks, vertical integration and streamlining operations. This is one of the main benefits of expansion, as such economies of scale can be reached. From what I can see, their streamlining of operations, be it food processing or distribution, have helped to allow the business to become more profitable over time.

Key Business Risks

Concentration in more “Traditional Food”

I believe that their unique selling point of high quality Chinese food helped it to develop a brand name and become planted in consumers’ consciousness. However, as a group, I believe the company could have focused too much on this kind of food. For example, most of their revenue is generated from Soup Restaurants, while even under brands like Cafe O, Tea House and Pot Luck also focus in more traditional local food too.

Hence, there is more concentration risk in such food products such that if the food goes out of phase, then the company can become heavily affected.

High Fixed Costs Structure

As with other F&B chains I have mentioned, the firm suffers from higher amount of fixed costs such as rent, capital expenditures and maintenance. When peeling into the financial statements, such costs have not moved much despite changes in revenue.

If revenue increases, this would lead to higher profitability, since costs will not increase as much. However, if revenue decreases, such costs might still be incurred which will reduce profits by quite a bit

Financial Statements

Revenue

Financially, the company seems to have had a steady increase in revenue since FY14, with some bumps at the start. This 8.1% increase revenue from the past year can be attributed to a $2.2m increase of revenue from operations of restaurants, and $1.1m in distribution and food processing. Revenue from restaurants increased because of food delivery services, and an opening of a new outlet in Century Square. $1.1m in distribution and food processing could be attributed to the growth in ready-made meals.

As can be seen, much of revenue actually originates from Singapore, and not abroad.

Profits

Interestingly, profits had soared from FY16 onwards, wth profit before tax almost doubling. This increase was from revenue increasing more than costs. For example, cost drivers such as inventories, purchases and consumables and employee benefits expense had increased only marginally despite strong revenue growth.

Liquidity

Current ratio for FY18 was 2.40. This is quite a strong short-term liquidity position, which is measure of how well a company can satisfy their short-term obligations. However, the company is holding a lot of cash, with almost 75% of current assets being made up of cash. Holding more cash could mean that there is less risk that the company might not be able to fulfil their short-term obligations, but it also means that there the company might be able to react to unexpected events more efficiently. However, holding so much cash could mean that the company is not reinvesting in their resources well enough, which isn’t healthy either.

Leverage

Over here, I will just define leverage as Liabilities/Equity. For Soup Restaurant, this figure is 0.75. This means that on their books, Equity is higher than Liabilities. Even better the business has current assets that are higher than their total liabilities. This shows that the company is well able to manage both short and long term obligations well.

Cashflow from Operating Activities

This refers to the cashflow that is earned through the firm’s normal operating activities and business operations. Amazingly, cash flow from operating activities was $4.4m, almost 2 times profit before tax. The reason for this high cashflow could be due to high depreciation expense, which are non-cash in nature, such that net profit is reduced but cashflow isn’t.

Cashflow from Investing Activities

On the flip side, much of cashflow is used to buy plant, property and equipment, almost $1m. This could be due to expansionary measures both local and abroad, but also newer equipment for kitchens and food processors.

Cashflow from Financing Activities

The high cash outflow of almost $1.5m, is almost exclusively made up of dividends paid out. This amount was almost twice that of the previous year. This leaves us with a Dividend Payout Ratio of almost 56%. Dividend Payout Ratio measures how much of net income will be paid out as dividends.

An estimate of free cashflow of $3.4m was realised in 2018. This leaves up with dividends being around 41% of Free Cashflow. FCF is a measure of how much cashflow is available to both lenders and shareholders of the firm. As a whole, the high cashflow generated from operations seems that dividends might be able to be sustained in the future. However, with plans to expand locally and overseas, I wouldn’t bet that they will pay the same amounts of dividends.

Valuation (as at 23rd April 2019)

One way to estimate how much a share is worth, is to compare the valuation of similar other companies with what other shares are trading at. If shares are undervalued, this could mean that share prices may rise in the future and vice-versa.

Over here, I have grouped together 5 restaurants including Soup Restaurant itself. By looking at P/E, P/S and P/B ratio, the share seem fairly valued, despite P/B being slightly higher than the average and median. I selected these few companies because I believe they represent more upmarket F&B offerings serving more Asian flavours, with similar enough business profiles.

However, I would add that this data might be biased towards P/E ratio, because Tung Lok had a negative EPS. Hence, P/E ratio should be lesser than the current average of 23X.

0 comments

👍 2