The recent continuous drop of the Katrina Group from its high since its listing a year ago has alerted me so I went to do a bit of due diligence looking for potential entry opportunity.
The volume for this company is usually low, so it was difficult for me to load up a sizeable position in the company. I had to take several days/weeks to do so and I think I loaded this overall over a total of 6 sessions for 210,000 shares, at an average price of about $0.196. This was lower than the IPO offering which was at $0.21 just a year ago.
I don’t think the company needed much introduction any further. They are known as an operator of various brands and restaurants that serve mainly casual dining. Some of its brands include the commonly known Bali Thai, So Pho, Streats, Hutong, Honguo. I’ve eaten most of them myself and it’s pretty decent.
The company currently operates 33 (+4 halal) restaurants in Singapore and 2 restaurants in the PRC area.
Katrina’s financials was impressive during the IPO prospectus, and this is what that propels investors to flock in into the company during the listing.
Topline is still growing as the company’s intention is to grow their market share and increase the number of outlet restaurants in the region. The latest news is they have partnered with Ajisen Group in a Joint Venture to grow the So Pho brand in China and HK. I think we should continue to see topline increasing aggressively in the next few years. GP Margin however, is one that we need to look out for and make sure it doesn’t deteriorate much further.
This financial model differentiation is also somewhat different from the rest of the other competitors like Tunglok, Japan Food in the sense that the cost of sales for Katrina represents not only the cost materials but also the payroll cost of the restaurant employees, the lease rentals and other support costs. The latter are usually presented in the other overhead section. If we take based on the previous year breakdown, the split for the ingredients, salaries, and rentals are 24.5%m 35.7% and 27.3% respectively. The rest of the 12.5% goes to other expenses.
The company faces increasing operating costs and start-up IPO costs during the year, as they need to hire more manpower and administrative costs in promoting their online ordering platform thus send its overhead up, as well as its net profits. There are the one-time IPO costs of $0.9m (the other $0.5m is capitalized against the share capital) and also the remuneration rewards to the management which increases the costs. In addition, the company also incurred higher depreciating costs due to the renovation and improvement to their premises which is a non-cashflow items.
Net Profit margin for Katrina is in line with the rest of the competitors.
What I like about the company is its cash flow generating ability, and we can see that with its dividend payout policy at 60%, the company will be able to use the retained earnings of 40% and its existing cash (no debt) to further expand into the region. Already, we see them expanding into 4 more halal restaurants at Bedok mall, Westmall, Vivo City and Marina One. They plan to triple the number of outlets to 90 by 2019 which I think is rather ambitious. I’d rather they go slower and create more efficiency economies of scale along the way.
The company has also established the online ordering platform in 2016 which is now available to order via Foodpanda and Ubereats. This has raked up $2.4m in sales so far and trend to continue over the next few years. Through this online orders, the revenue growth from this channel has been equivalent to adding two new outlets at a much higher margins.
With the net proceeds from the IPO still available majority for expansion, and the company has no debt position, we should see them engaging in more M&A news and grow more outlet in the next 1 to 2 years, and this should translate into higher earnings and bottomline at the end of the day.
There are plenty of risks in F&B business and I think it needed no further introduction. Risks such as the increasing rentals, and employee benefits continue to increase in our glory days and the barrier to entry is usually low for such business.
From valuations view, F&B tends to trade at the higher range of between 16x to 19x earnings, and you can see why the share price of Katrina has crashed down since they have a very poor EPS in 2016. My thesis play is for them to grow on year on year in 2017 which will bring its earnings higher and thus will re-rate the valuations for the stock.
Thanks for reading.