Everyone Loves Food! But Should You Love RE&S Holdings?
It is no surprise that everyone, particularly Singaporeans, loves food. In fact, as self-touted "Foodies", one could say we even take food seriously. A few moments on popular social media platforms such as Tik Tok, Instagram, or (god forbid) Facebook will show you the sheer amount of local content just... showcasing and reviewing food. Japanese food has been especially popular with us Singaporeans. I'm not sure whether it's the mentality that Japan is renowned for its high-quality products, or if Japanese Food is just superior, but all I know is that Japanese food is here to stay.
With this in mind, I remember (quite vividly might I add) that a few months ago, a new restaurant chain "Sushi-Go" was being hyped up for having a special promotion of sushis being priced at just one Singapore Dollar, supposedly having equal or better quality sushi than Genki, another popular sushi chain. The hype was seriously quite crazy, with videos of lines snaking all over and making their rounds on the internet, it seems like Singaporeans just can't resist the food craze sweeping the nation!
If you're anyone like me, you may not find one-dollar sushi as being worth queuing for hours upon hours, but for a good stock? You bet I'm gonna queue my orders! Jokes aside, I always thought that such Japanese chains were, you know, actually Japanese in origin. I guess you could make the argument that founders are typically Japanese, but I always picture a scene of a small, quaint shop just starting in the streets of Tokyo or Osaka. Imagine my surprise when I was just doing some equity research, stumbling upon RE&S Holdings, and looking at the plethora of F&B restaurants under their portfolio, listed on the SGX Exchange no less!
"RE&S was founded in 1988 by Osaka native Hiroshi Tatara, bringing a slice of Japanese lifestyle to Singapore with our Takahashi and Fiesta restaurants. As RE&S grew, we developed new brands and concepts like Kuriya, Shimbashi Soba, Kuishin Bo, and Ichiban Boshi. Today, we’re a household name all over Singapore. Most recently, we’ve expanded our Japanese food production and distribution capabilities, adding dozens of food products on top of our current offerings. Our story, our future, is just beginning" - RE&S Holdings' Origins from their Website
As you can see, they own Sushi-Go, the aforementioned chain I was talking about earlier. Additionally, I think all Singaporeans will recognise the likes of Ichiban Sushi, truly a household name. From the list, I also recognise Yakiniku-Go and have personally patronised them before, don't exactly remember the experience though.
KOPL, are you sure food retailers are a type of stock that you'd be interested in? Don't you remember how COVID-19 screwed over businesses?
I do, actually, and I would never base my Investment thesis on personal experience or anecdotes. I think by now, you guys would know that I absolutely love undervalued, high-yielding dividend stocks and that I do heavily take into account a company's fundamentals.
So, let's continue, and analyse how did RE&S Holdings actually do in pre-COVID times, and "post"-COVID times.
Before we jump to conclusions, it is important to review the company's internal financial review of the year to see things from their perspective. In terms of revenue, the company attributed the higher amount compared to FY21/20 due to removal of social distancing measures which allowed for higher dine-in capacity, coupled with higher food delivery sales. Higher operating expenses were also attributed to the withdrawal of government and landlord support due to COVID-19, as well as higher raw material costs which may be due to inflation.
Not to mention, the average interest rate for their bank loan liabilities is only 1.14 to 1.35%! Also, from the information above, you can see that there is no heading that states any debt due before 2 years. Hence, one can safely assume that all non-current liabilities need not be refinanced till around 2025! This means that RE&S Holdings is rather insulated against the high-interest rate environment we are currently in.
What is the management team like?
Firstly, I want to start by saying that I highly commend the team at RE&S Holdings for creating their annual report in such an easy-to-read format, coupled with including accessible share metrics that are extremely convenient on their website. I truly appreciate the effort they have gone to ensure an optimal experience for shareholders doing their research. Additionally, I find that taking advantage of the previously low-interest rate environment reflects highly on the management team for knowing when to strike when the iron is hot. With that out of the way, I implore you, dear reader, to now take a look at the dividend history of the company.
By looking at their history, you can see that the company did not do any rights issues during the COVID-19 pandemic and simply did not declare any dividends. Additionally, notice how the dividend has been climbing rather fast. In FY2022, RE&S Holdings' Payout Ratio was approximately 60%, which I find is a good balance between returning value to shareholders coupled with growth. At a current dividend yield of 7%, it seems like a rather decent buy. However, I should caution prospective investors that the reason why dividends could climb so high from FY2018 to FY2022 was that FY2018 had a payout ratio of 40% only. My key takeaway from this is that the management is rather mindful of shareholder interest, which I like quite a lot.
Future of RE&S Holding's underlying business:
Moving forward, it seems like the company has shifted its focus towards what they call Quick Service Restaurants (QSRs), which presumably focuses on high convenience and diner turnover. Additionally, it seems like they have increased their online presence through delivery apps to cater to those that would prefer a highly convenient experience. I think this is a rather standard move considering the fact that the COVID-19 pandemic has highlighted glaring weaknesses in the F&B industry's business model. That said, I think the focus on QSRs is an interesting concept, which may bear fruit given Singapore's escalating competitive environment, where workers may simply have less and less time dedicated to mealtimes. However, I have some concerns regarding how they plan to further expand in a few years.
From the above infographic from their website, it seems like they have penetrated most of Singapore's neighbourhoods. This concerns me a little regarding their future growth prospects. At a glance, it seems like the only place I can think of where they can continue to focus would be the North West of Singapore, such as Yew Tee and Choa Chu Kang. I am also rather concerned regarding their 75 outlets figure. Since it outnumbers the malls listed, I cannot help but feel that having multiple restaurants in the same mall may cannibalise sales. However, this is still as of now an unfounded concern since there have been no statistics regarding this. Another headwind I foresee is that RE&S Holdings specialises in atas (expensive/fancy) fare, which may prove detrimental to its earnings when a recession comes. I hope that the company will not raise their prices by exorbitant amounts, as I would classify their food as rather price elastic. Raising the price will only do more harm than good, and the problem is only exacerbated when you consider the low barriers of entry faced by competitors looking to have a slice of the F&B pie.
Notwithstanding these concerns, I am still rather optimistic regarding the company's growth. I believe that their outlets can slowly extend to our nearby neighbours, which is what they've been doing with Malaysia. Although this exposes the company to Forex risk, I think it is the right step to ensure that the company does not lag and stagnate in its earnings. The company could also make more cost-efficient decisions such as negotiating with suppliers or reviewing their operations.
KOPL, cut to the chase lah, is RE&S Holdings undervalued?
Okay okay. We'll take a look at RE&S Holdings' share price history and compare its valuations to its competitors.
According to their website, it seems like their "Financial Leverage" is around x3.3, much higher compared to FY2019 1.7, but understandable when you realise the fact that they took on a large amount of debt in FY2020 due to the COVID-19 pandemic, with a high of x4.5 then. However, the group's current Interest Coverage Ratio is at around x13.7 for FY2022, which offers a relatively safe margin of safety. If you take a look at the group's debt profile, approximately 90% of loans have fixed rates,
Okay, I know what you're going to say. "KOPL, Kimly, and Old Chang Kee are rather defensive leh, I don't think you can compare like this right..." I'm inclined to agree with you. However, I feel Kimly and Old Chang Kee(OCK) have limited growth prospects for the foreseeable future. Also, it’s Old Chang Kee, is it really that defensive? If they raise their prices, I'm quite sure many Singaporeans will not be happy. OCK's reputation is already not that good to begin with, with many dismissing it as "overpriced street food". Additionally, I feel Kimly is unable to break into other countries' markets since there isn't much opportunity for brand loyalty. Japan Food Holdings is the closest competitor against RE&S Holdings and is priced at a relative premium. Perhaps this is due to the relatively lower amount of debt borrowed by Japan Foods. However, when I look at its competitor, none of the brands stood out to me, which makes me feel that RE&S Holdings' potential outshines that of Japan Foods. To close off, RE&S Holdings' valuations seem rather in line with the industry standard, and hence rather fair to me.
Parting Thoughts
I like the prospects of this company, given its high potential for expansion and current high dividend yield. That being said, I am rather worried about the company's high leverage. However, I acknowledge that debt is most likely considered "good" when taking into consideration the favourable terms they have secured them in. I believe that investing in this company is a bet that a black swan event like COVID-19 will not happen again, though I am still concerned about a potential economic recession. I am also skeptical regarding the sustainability of the 7% dividend, as I suspect that the management may reduce the payout ratio to an average of 50% to reinvest earnings for growth or to save for a rainy day, which would result in a dividend yield of around 6%.
For this stock, I am having a massive internal debate as to whether or not it is a good price currently. I am leaning towards a "buy" as long as the fundamentals do not significantly deteriorate to diversify my dividend portfolio, and will be adding it as a "mid-priority" stock to my stock pipeline, though this may be subject to change. I will be sure to update this blog if I ever pick this stock up.
Miscellaneous/Unrelated Thoughts:
I hope you have thoroughly enjoyed this post when I try to add a more personal flare to it. Just to add, I do believe that this fundamental analysis post is one of my more in-depth and lengthier ones. I am still trying to fine-tune my process of analysing stocks, and I hope that this post serves as a display of me going in the right direction. As always, do let me know any of your thoughts by commenting down below!
Think this article is something you'd want more of? Subscribe here using your email to get notified about my latest blog articles, I'd truly be grateful!
Disclaimer: Please take everything published within this blog with a pinch of salt. Nothing I say here should be misconstrued as any form of financial advice whatsoever. In fact, I am probably the absolute last person you should approach for any sort of advice. All self-computed figures are calculated to the best of my ability, but I cannot guarantee they are 100% accurate.
Thank you for reading my blog, and I hope you have learnt something, no matter how seemingly minuscule. I would greatly appreciate it if you subscribe as such posts take a decent chunk of time to dish out, ciao!
Comments
Post a Comment