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Higher costs bite F&B earnings; overall pie growing, but shift towards lower end seen

Samantha Chiew
Samantha Chiew • 8 min read
Higher costs bite F&B earnings; overall pie growing, but shift towards lower end seen
SINGAPORE (Aug 19): In this latest earnings season, most of the local F&B stocks suffered huge losses. While revenue for most have increased, operating costs rose by a bigger quantum, causing a drag in earnings.
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SINGAPORE (Aug 19): In this latest earnings season, most of the local F&B stocks suffered huge losses. While revenue for most have increased, operating costs rose by a bigger quantum, causing a drag in earnings.

BreadTalk Group saw its 2QFY2019 revenue increase 9.8% y-o-y to $163.3 million, from $148.8 million last year. The company’s business divisions generated higher revenue. However, earnings in the same period dropped more than half to $1 million from $2.4 million in the previous year. The disappointing bottom line was attributed to an increase in the group’s distribution and selling expenses, which was 40.4% higher at $85.6 million, from $60.9 million last year.

For the quarter, BreadTalk’s bakery division suffered a loss of $1.9 million; its “4orth” division — which houses new and experimental F&B concepts — bled $3.2 million in the same period.

Nonetheless, analysts are keeping a neutral stance on BreadTalk, with DBS Group Research having a “hold” call and a price target of 77 cents and RHB Research maintaining a “neutral” call with a price target of 71 cents.

On Aug 14, a fortnight after the 2Q earnings were announced, the company said group CEO Chu Heng Hwee, who was appointed to the role in July 2017, is serving notice and will leave the company by year-end for “personal and health reasons”. George Quek, founder and executive chairman, will assume Chu’s responsibilities.

Jumbo Group, on the other hand, maintained its revenue, up just 0.8% y-o-y to $36.4 million for 3QFY2019. The company says that during the quarter, its most popular outlet, Jumbo Seafood Gallery at The Riverwalk, was closed for a month and therefore did not contribute to revenue and earnings.

However, during that quarter, the company was busy expanding elsewhere. It opened a new Jumbo Seafood outlet at Jewel Changi Airport in early April, and launched two new dining concepts — Zui Yu Xuan and Chao Ting — at Far East Square. Additionally, it expanded its footprint in Taiwan with the opening of its third Ng Ah Sio Bak Kut Teh outlet in Hsinchu City, bringing the total number of outlets in Asia to seven.

As a result of the start-up costs of these new outlets, the company recorded a 24.8% y-o-y fall in 3QFY2019 earnings to $1.7 million, from $2.2 million in 3QFY2018.

Despite the fall in earnings, analysts remain bullish on the stock, with RHB Research and DBS Group Research both keeping their “buy” calls on Jumbo and with the same price target of 47 cents.

Meanwhile, Neo Group saw a 9.7% increase in its latest 1QFY2020 revenue to $42.4 million from a year earlier. Although the group is still in the red, it has managed to narrow its losses by 68.4% to $400,000, from a loss of $1.3 million a year ago.

Other F&B players that exhibited a similar “earnings down, revenue up” trend are Japan Foods Holding and Kimly. The former reported earnings of $900,000, 8.8% lower for 1QFY2020, versus the year-earlier period, even though revenue increased 8.8% y-o-y to $18.1 million. Kimly, on the other hand, reported earnings of $4.7 million, down 6% y-o-y, even though revenue increased 3.5% y-o-y to $51.6 million.

Crabby season

For No Signboard Holdings, which specialises in white pepper crab, things were a little more lacklustre. In its latest 3QFY2019 results, the company recorded a loss of $1.4 million, compared with earnings of $800,000 in the same period last year. This came on the back of a 15.1% drop in revenue to $5.9 million, from $7 million a year ago.

The group blamed the fall in revenue on weaker contribution from its seafood restaurants, with average spending per customer dropping about 10% y-o-y. Revenue from the group’s beer segment also saw a sharp fall, owing to increased competition in the industry.

To make things worse, the group announced on Aug 8 that it would be ceasing the operations of its three Hawker QSR restaurants, including a months-old outlet at Jewel Changi Airport, owing to continuing losses. It expects to make an impairment loss of about $500,000, owing to outlet renovations. “While market research was undertaken, the actual results did not translate into sustainable sales and, ultimately, the product offering and concept was not successful,” says the company in an Aug 14 statement.

Since listing on the Catalist board of the Singapore Exchange on Nov 30, 2017, the stock has dropped more than 80.7% from its IPO price of 28 cents to close at 5.4 cents on Aug 14.

Soup Restaurant Group, famed for its Samsui Chicken, suffered a similar fate as 2QFY2019 earnings dropped 74% to $97,000, while revenue declined 3% to $10.2 million from the previous year. The drop was caused largely by higher depreciation charges taken in accordance with new accounting standards.

Appetite for expansion

Not all F&B stocks were down this season. One that deviated from this trend is food court operator Koufu Group. The company stood out with a 16.2% jump in 2QFY2019 earnings to $7.2 million, from $6.2 million in 2QFY2018, owing mainly to higher contributions from its business segments.

Revenue increased 7.3% to $58.1 million from $54.1 million a year ago, with the group’s F&B as well as outlet and mall management segments seeing higher revenue contributions. Koufu’s board also proposed an interim dividend of one cent per share.

During the quarter, the group opened a new coffee shop in Singapore and secured three food court leases. It also continues to grow its R&B Tea and Supertea brands both locally and overseas with four new openings in Singapore in 2QFY2019, while entering into a joint venture on July 4 to expand the brands into Indonesia. Koufu also secured a lease in Malaysia to operate its first tea beverage kiosk in Melaka, which is expected to begin operations in 4QFY2019.

Meanwhile, the group is deepening its footprint in Macau with the opening of a second food court in Macao University. It has secured a lease for its third Macau food court, which is expected to open in 1HFY2020.

UOB Kay Hian likes the stock and considers it undervalued and the most profitable listed F&B company. It has a “buy” call on Koufu, with a price target of 95 cents. With full-year contribution from Rasapura Masters, new outlets ramping up and steady rollout of R&B Tea outlets, Koufu’s net profit is expected to grow at a doubledigit rate from 2019 onwards.

“We expect a steady growth path ahead, since the second half is seasonally stronger [than the first half, which tends to be seasonally weaker, as February is a short month and there are extended closures during Chinese New Year],” writes UOB Kay Hian analyst Joohijit Kaur.

DBS Group Research also has a “buy” call on Koufu, albeit with a more conservative price target of 88 cents. Analyst Alfie Yeo says Koufu is on track to delivering earnings growth via a turnaround of its kiosk businesses and improving food court performance.

“We like the stock for its sound fundamentals, including stable earnings, strong balance sheet, cash flows, ROAE (return on average equity) and decent dividend yield,” says Yeo.

What’s cooking?

According to the Food and Beverage Services Index for June 2019 released by the Department of Statistics Singapore (Singstat), total sales value for the F&B sector was up 5.3% y-o-y and 3.2% m-o-m.

The Singstat data also shows that, compared with the previous year, sales from restaurants rose 5.1%; fast food outlets, 10.6%; food caterers, 5.7%; and other eating places (including cafés and food courts), 3.2%.

DBS’s Yeo finds these figures encouraging, as more local retail sales demand is flowing into food service, with cafés, food courts and fast food outlets growing strongly over the past few months. F&B companies with a higher proportion of earnings from mass market segments include Kimly and Koufu.

“Mass market F&B has been resilient and providing support to F&B retail sales, while restaurant sales have also picked up notably. With the current economic environment less buoyant, however, there may be headwinds to 2QFY2019’s F&B retail sales momentum for restaurants, as consumers may trade down to more economical food or cook at home,” adds Yeo.

UOB’s Kaur says the growth of the other eating places segment in 1H2019 grew a healthy 3% to 4% y-o-y, outpacing full-service restaurants.

“This could indicate that consumers are switching to lower-value dining options amid a weaker economic backdrop. This trend could continue into the second half and companies such as Koufu are well-positioned to capitalise on it. We do note that popular brands such as Jumbo Seafood are still growing in terms of same-store sales growth, and their new outlets at Jewel Changi and ION Orchard seem to continue to do well,” says Kaur.

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