UOB Kay Hian is initiating a “buy” recommendation on ST Group Food Industries with a target price of 14 cents, as lead analyst Clement Ho likes the group’s portfolio of F&B brands.

In an Oct 7 report, Ho says, “ST Group’s exclusive franchise rights to popular F&B brands has enabled it to rapidly scale up to 121 outlets – across Australia, New Zealand, UK and Malaysia – while maintaining stable net margins at more than 7% (prior to the Covid- 19 impact).”

Some of the master franchise and license agreements with popular brands the group currently holds include PappaRich, NeNe Chicken, Gong Cha, Hokkaido Baked Cheese Tarts and IPPUDO.

See: ST Group brings flavours from home to Asians abroad, enjoys rapid revenue growth with outlet expansion

Prior to FY2020 when the group registered its first drop in revenue and earnings, core net profit grew at a CAGR of 59% in FY2016-2019, driven by growing sales from its rapid expansion.

Being a master franchisee with a developed franchise system supported by its central kitchen and logistics system, the group is able to rapidly scale up proven brands and expand a network of restaurants and kiosks in different geographical regions to support earnings growth without the need for heavy capex.

”The number of sub-franchise and licensed outlets has more than doubled from 30 in FY2016 to 72 in FY2020, making up 62% of the total number of outlets, which we believe is testament to ST Group’s ability to attract local partners to join as sub-franchisees,” says Ho.

The analyst also believes that given that franchise revenue (13.6% of FY2019 revenue) and supply-chain sales (18.2% of FY2019 revenue) command higher margins of 15-20%, there is room for margin improvement as the group expands its franchise network.

In FY2020, the group has opened 10 outlet (net of closure) and has eight new stores in the pipeline for the rest of 2020.

“With stronger contributions from outlets opened in 1HFY2020 (which were hampered by lockdown measures) and new outlets in FY2021, coupled with the resumption of economic activities in its core markets of Australia and New Zealand, we expect net profit of A$2.5 million in FY2021, up from A$0.8 million in FY2020,” says Ho, who also foresees a stronger recovery in FY2022 with net profit growing to A$4.1 million, barring another round of stringent lockdown measures.

The stock is currently trading at 1.1 times FY2021 earnings and 6.7 times FY2022 earnings, which the analyst views as undervalued, given its growth potential on the back of its strong portfolio of F&B brands.

As at 12.33pm, shares in ST Group are trading at 12 cents.