I think retail investors are not a stranger to this company. This is a company that owns several chains of restaurants across the island that serves the famous Chilli Crab that become one of the iconic trademark of Singapore food to the tourists. What many doesn't know is that the group also owns several chains of other eateries such as Jpot, Ng Ah Sio Bah Kut The and Chui Huay Lim Teochew. Personally, I live in the are that is located near the latter two so I have tasted them and are very impressed with the food, though publicity wise they are not as popular.
When I first read that the company was going for an IPO, I was very sceptical about the sustainability of the F&B industries to survive because everyone knows that the barriers to entry is low and running costs can get difficult to operate in a place like Singapore. Simply put, based on the Porter 5 forces, it is an industry that I generally wanted to avoid.
In the past year, I did a similar extensive research during my MBA program on how much does it takes for one to open a café or eateries. You can refer to the post Here if you are interested.
But let's see how Jumbo numbers have pans out.
Gross Profit Margins
Based on the guidelines from the F&B industry (which I also emphasized in the above café post), the general rule of thumb for raw materials or costs of goods sold should never exceeds 35% or 1/3 of the overall gross sales. In other words, the gross profit margin needs to maintain at above 65% in order to compete and survive.
Jumbo performance was a couple of points off but you can see it's near. In fact, given Jumbo's strong moat in an industry, I would have expected slightly more from them. The reason for this is because it is very difficult for an F&B industry to push the costs to the customer when you have an elastic demand where customers have plenty to choose from what they want to eat these days.
For the purpose of easy reference, I have drawn up a topline comparison amongst the local listed F&B business. You can see that all of them have topline margin that are better than Jumbo and perhaps crab business is not as profitable as we think it is. Still, this is something worth noting for, especially when we consider the EBIT margin comparison later on.
For an F&B industry specifically operating in Singapore, labor and lease expenses would take up the majority of the overhead costs given the high wages and rental leases we have over here.
For labor costs, the general rule of thumb is it should not exceed 30% of the overall gross sales. Many companies such as Japan Foods and Sushi Express are already using innovative products such as technology and Ipad for food orders without hiring an extra headcount to do the manual task. Jumbo's salary related costs amounted to an average of around 28.2% over the past 3 years. Again, the number is close and you can see why it is very competitive.
For operating leases, the general rule of thumb is it should not exceed 10% of the overall gross sales. Rental costs are a big killer in Singapore. With more Reits asset manager pushing for more rental reversion every year, it is only a matter of time where we will see the fittest survive. For instance, I went to research on the malls at Orchard and they were pushing for a rental price of around $14/psf per month. So if you are looking at around 4,000 sqft for your restaurant, you are already looking at a rental of $56,000/month in rent.
Jumbo's operating leases amounted to an average of around 10.5% over the past 3 years. Again, the number is inching very close to the benchmark.
The overall EBIT margin has trended quite strongly at above 13%, and this is one of the stronger compared to the other F&B business.
If we take a look at the comparison, it is worth noting for that even though these competitors had higher topline margin, their EBIT margin is way lower than Jumbo, which indicates that Jumbo has the upper hand in managing overhead productivity over all the other competitors. In fact, the EBIT margin for the rest is so low that they would not be able to churn out any room for errors, otherwise they would end up in a loss position like Tunglok.
I am just penning my thoughts here on the F&B industry as a whole.
If you ask me on whether the fundamentals of the industry is strong, my answer would have been no because everyone is very cost competitive and they know what is the benchmark in order to survive in the industry. For Jumbo (or any other F&B industry) to work out well, they would have to go for horizontal expansion to open more branches to reap in more profits. This is exactly why they probably needs the IPO to open up other branches in a new area. It is very difficult for the industry to expand vertically by increasing the margins because the demand is elastic. And any small increase in price to customers would result in a large reaction from the customers.
I will not be going through the cashflow portion because F&B would generally not have much issues with Cash Flow. Their cash turnover is usually paid upfront for the raw materials and once they have them sold (foods do expiry quickly), cash would be generated again. The same goes with inventory turnover. Capex would most likely be in the form of growth capex if they decide to expand horizontally overseas.
From a valuation perspective, the company is trading at a multiple of 9.4x based on the latest trailing earnings and the IPO price at 25 cents. They are decent and may trade higher to match other F&B valuations but the 3 year numbers that are visible to us is a small data to extrapolate over the next 10 years. Assuming they can maintain and extrapolate it horizontally, this looks like a decent multiple buy after all. Still, I am not entirely comfortable with companies that are being valued through earnings multiple and the company having no organic growth power logically.
Based on the above, my verdict is the IPO price looks decent but the overall fundamentals lack sparks, catalyst and margin pressure, which might limit the growth of the company if one is to hold this for the long term. At least for me, I am certainly not a big fan of the industry. I prefer to eat and dine as a customer.