Singapore Kitchen Equipment (SKE) Limited is a tiny stock listed in the Catalist. It was only recently listed on the Catalist on 22 July 2013, and has a market capitalization of only S$24 million.
The Business
Singapore Kitchen Equipment (SKE) Limited, operating with the trade name Q’son Kitchen Equipment Pte Ltd (Qson), since established in Sept 1996, had gone from strength to strength, providing back end food preparation and cooking solutions.
The Group’s two key business segments are Fabrication and Distribution Segment and Maintenance and Servicing Segment.
- Fabrication and Distribution Segment
Qson is a savvy fabricator of stainless steel products for the commercial kitchens, many of the processes which are automated for savings in resources and wastage reduction. Its assets consist of a factory space of 25,000 sq ft and 60 production workers.
The company is involved in the design, production as well as the import and distribution of the kitchen products and systems.
- Maintenance and Servicing Segment
Qson considers itself as the leading kitchen equipment servicing company in Singapore, and claim that it had the pole position for many years. It stated that it has the largest skilled team of technical staff, numbering 87 with 29 vehicles.
All technical staff had undergone rigorous on-the-job training, classroom type and factory based training. And 80% of the technical team is certified by local authorities to carry out works safely and competently.
Revenue breakdown
As per the 2016 Annual Report, the Group’s revenue increased by S$0.2 million, from S$26.0 million to S$26.2 million in FY2016.
The current revenue mix of SKE consists of Fabrication and Distribution (76 percent at S$19.9 million), and Maintenance and Services (24 percent at S$6.3 million). For its Maintenance and Services segment, SKE currently holds the biggest market share in Singapore.
Cook Chill System, Productivity Driven Cooking
In this article, it was stated that management felt that their edge over their competitors, is the Cook Chill System suite.
“The brilliance of the Cook Chill System, is none other than the ability to cook food in advanced, freeze it, maintaining its nutrients encompassed within, and yet preserving the texture, quality, presentation and flavour of the food. All the cooking can be done at a central location several days before the food is consumed, stored in a special freezer that locks all the qualities of the food, and then re-heated up before it’s consumed. It saves time, labour costs, and drives effectiveness.
Although this concept was not very acceptable by Chinese kitchens and restaurants at first, management revealed that they are seeing a slow shift towards warming up to this idea as SKE do a lot of demonstrations and live presentations on this in hotels and restaurants’ kitchens. Management said that despite this uphill climb, they see potential in this.”
I am not working in the F&B sector, however, personally, I do believe that this Cook Chill method is not proprietary.
A quick search online revealed a number of other companies promoting this method albeit probably by using their own in-house systems.
Nevertheless, the trend in Singapore does suggest that eateries could be using this system more in the future given the shortage of manpower and area for preparation, and many of SKE’s competitors have not caught on to promoting this method yet. More companies are opting for this system for the following reasons:
- Keep food quality and standard consistent,
- Maintain freshness of food,
- Quick and easy way to re-heat the food on the spot,
- Mass production in bulk using a central kitchen elsewhere (where rent is lower, and quality can be better controlled).
Macro trends in SKE’s favour
Let’s face it, Food is very much part of the Singapore culture. When we are overseas, we can’t help thinking about the local fares back home, we like to talk / blog / post photos of the food we eat, our food is, without a doubt, one of the main selling points of Singapore to tourists….
![[F&B] Clark Quay-low res[2].jpg](https://apenquotes.files.wordpress.com/2017/05/fb-clark-quay-low-res2.jpg?w=402&h=268)
And Singapore is among the top spenders in Asia Pacific for dining. In this report released in 2014, it highlighted that Singapore diners remain the biggest spenders in South-east Asia, and is second place in the Asia Pacific behind Hong Kong. Diners here spent an average of S$248 a month dining out in 2013. I am sure that figure would have risen by now in 2017.
And the above is not the macro trends I am talking about here. Personally, from how I see it, there are basically 2 macro trends that are in SKE’s advantage. See below.
1) Malls: Less Retail, More F&B
In the past, there used to be a higher proportion of retail shops as compared to F&B outlets. However, in recent years, consumer behavior has changed. The evolving purchasing habits of the younger generation of shoppers have disrupted this mall ratio.
Online shopping has become a very big problem for most traditional shopping malls. Why spend time physically walking around the malls looking for the stuff you want, when you can search for it from the comfort of your home? There are more variety and prices may be lower (plus free shipping)…
- Mall bad news… but some bright spots (read here)
- Allan Zeman Sees The Future Of The Mall As Less Retail, More Lifestyle And Entertainment Spaces (read here)
- F&B concepts are shopping malls’ new ‘anchor’ (read here)
However, the need for ‘experiential’ social interaction and entertainment cannot be fulfilled by the internet. People can’t eat off the internet, so they still have to go out for entertainment and restaurants. Yes, there are numerous online food delivery companies eg. Deliveroo, Foodpanda, UberEATS, etc…. but all these can’t fulfill the desire for a nice, comfortable new social setting, where you and your friends or loved ones can come together for a nice meal.
Indeed, in Singapore, I do notice more F&B outlets sprouting out in the local malls.
- New Five Food Way in Tiong Bahru Plaza (read here)
- More eating and drinking, a little less shopping, in malls (read here)
See below for extract from this article.
So given the rise of the F&B sector in Singapore (at the expense of the retail sector), then shouldn’t we be looking at the F&B companies instead.
After all, in the tiny universe of our local stock market in Singapore, there are many listed F&B companies eg. Japan Food, ABR Holdings, Pavilion Holdings, Katrina Group, Food Empire, Breadtalk (Din Tai Fung), Old Chang Kee, Kimly, Jumbo, Neo Gardens, Sakae…. Isn’t it super obvious? Won’t these companies be the beneficiary of this macro trend?
Perhaps tooooo obvious. That brings me to the next macro trend, see below.
2) The high failure rate of F&B start-ups
I think, to many, after years working in the corporate world, their dream is to own a nice little quaint cafe or eatery, and be their own boss. No more working for somebody else, time to be your own boss. You get to set your own working hours, decide what to list on the menu and along the way, get to enjoy interacting with your customers, watching them enjoy what you have prepared.
Indeed, the F&B industry has a low barrier to entry. However, many new entrepreneurs are ill-prepared when they first start-up an eatery. Poor planning and the manpower issues are some of the reasons why
However, many new entrepreneurs are ill-prepared when they first start-up an eatery. Poor planning and the manpower issues are some of the reasons why almost half of all eatery start-ups fail.
Back to my earlier question: Why don’t we focus on investing in F&B players instead.
As much as I like the F&B companies, the fact is, operating a typical F&B outlet (cafe, restaurants, food court, coffee shops, etc) in Singapore is extremely tough. The Singapore foodie customer is fussy and fickle.
With the high rents, tight labour market and the many competitors… it is simply tough operating eateries in Singapore. This applies not just to start-ups but also established F&B players.
- Sakae to cut 6 more eateries as it gets set to roll abroad (read here)
- 5 Food Places That Are Closing In 2017 — So Get To Them Soon (read here)
I have previously written a blog post pertaining to Japan Food (read here) in June 2015, and in it, I quoted the Executive Chairman and Chief Executive Officer of Japan Foods, Mr Takahashi Kenichi who mentioned that “the operating environment has become increasingly challenging due to stronger competition and higher business costs”.
We often hear about the success stories, but few would like to share their failure stories. To many, running their own eateries will always remain just a dream. But that does not stop many from trying.
Nevertheless, like any competitive industry, it is not the main players that are the main beneficiaries… it is the ‘pickaxe’ companies. These are the ‘secondary tier’ sister companies supporting the main players.
Think ComfortDelGro (Main) and Vicom (Pickaxe), SIA (Main) and SIA Engineering & SAT (Pickaxe), Samsung / LG / Sharp / Apple (Main) and Corning glass (Pickaxe).
- Seeing the world upside down (read here)
In fact, the more competitive the industry is, the more lucrative it is for the “supporting” companies.
Incidentally, Neo Group has invested in SKE.
- Neo Group invests in Singapore Kitchen Equipment Limited (read here)
And I do believe, Singapore Kitchen Equipment happens to be in such a ‘lucrative’ position. Whether the eateries survive or not, they still need kitchen equipment. Perhaps a higher failure rate for eateries might even mean more business for its Fabrication and Distribution division. :p
Ownership
As mentioned earlier, Singapore Kitchen Equipment Limited was only recently listed on the Catalist on 22 July 2013.
The stock is thinly traded (low liquidity). Free float of 14.83m vs Shares outstanding of 150.00m. Basically the free float is less than 10% of the shares outstanding.
To get an idea of how thinly traded this stock is, see below extract from the 2016 Annual report:
In total, there are only 347 shareholders. To get a better sense of perspective, Vicom, another thinly traded stock, in their 2016 Annual Report states that they have 3,154 shareholders.
At at the current SKE stock price of $0.16, with $1,600, you can be on of the ‘major’ shareholder :p Just kidding.
The company is majority owned by the management: Chua Chwee Choo Sally (Managing Director), Lee Chong Hoe Alan (Executive Director) and Cheng Chun Choi Frankie.
From the above, there are 2 ways to see this:
The good:
- As the company is majority owned by the management, it is likely that the interests of the management are aligned with that of the minority shareholders.
- The low liquidity often reveals inefficiency in the price (price swings are lumpy), and prices could at times swing far from the true value. Also, the stock could have been overlooked by most institutional fund managers or analysts. This allows opportunities for retail investors.
The bad:
- As there are low liquidity and a low percentage of free float, it would easy for the major shareholder to privatize the company during market corrections or crashes esp. when the price is low and below NAV. Forcing the minority shareholders to sell at a un-favorable price (favorable if taken into context of the market crash and general negative market sentiments), even though they have holding power. It disrupts the ‘buy and hold’ long-term strategy.
- And oh yeah, this is not the kind of stocks traders look for. Not the kind of stock for Options or Derivative trading. Hardly any movement in the stock price.
Financial Fundamentals
Looking at the above figures:
The bad points:
- In terms of valuation, Price/book ratio is high (>1).
- The current ratio at 3.49 is too high. A high current ratio can be a sign of problems in managing working capital. (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses).
The good points:
- In terms of valuation, PE of 9.41 is low. Although, price to book is slightly high eg. >1.
- In terms of Management effectiveness, the figures are respectable. Not as good as I would like it to be eg. ROE>20%. But mid to above average.
- Balance sheet wise: With a total cash of SGD9.2M vs total debt of SGD1.3M, thus leaving the company to be within an overall cash position of SGD7.9M. But as highlighted above, the current ratio is too high.
- The dividend yield is good at 3.13% with a payout ratio of only 43.81%.
Historical financial data
In general, excluding FY 2012, the trend has been up.
Trailing PEG and Intrinsic Value
Let’s do a quick study on the current share price of SGD 0.16 – via Trailing PEG and Intrinsic Value.
However, before we continue, please note that the data available is insufficient (the company is only newly listed) – so whatever conclusion arrived is highly inaccurate.
1) Trailing PEG
P/E: 9.41
Dividend Yield (%): 3.13
3 years EPS compound growth rate: 184.94 (I used 3 years, as the 5 years data is distorted by the unrealistic value in FY2012).
The trailing PEG will be 9.41/(3.13+184.94) = 0.05. Which is good (below 1).
2) Intrinsic Value
If we calculate the intrinsic value using a growth rate of 100%. (Discount of the 3 years EPS compound growth rate which is 184.94%)
F = P(1+R)N
- F = the future EPS
- P = the starting (present) EPS (SGD 0.02)
- R = compound growth rate (100%)
- N = number of years in the future (5)
Estimated future EPS: 0.64
I will be estimating the future PE of SKE to be 9.4.
Future Stock Price
P=EPSxPE
- P = future stock price
- EPS = future EPS
- PE = future PE
Hence future stock price of Sarine is 0.64 x 9.4= SGD 6.016
Intrinsic Value
P=F/(1+R)N
- P = present (intrinsic) value
- F = future stock price (6.016)
- R = MARR (15% or 0.15)
- N = Number of years (5)
Hence intrinsic value of Singapore Kitchen Equipment Limited is SGD 2.99
Given the current stock price of Singapore Kitchen Equipment Limited on 25 May 2017 is at SGD 0.16, there is a big margin of safety (94%) base on the estimated intrinsic value.
Well, anyway the historical financial data is just insufficient to make any conclusive forecast. Shall monitor the company more.
On another note, I personally feel that investors need to develop an ‘edge’. The fact is, information and data are everywhere. We are swarmed with information constantly. However, having current and correct information though important is not give us investors an edge. It is having a second (or third) level of thinking, to see things differently and rationally. OK go figure…. :p
- Second-Level Thinking: What Smart People Use to Outperform (read here)
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