Monday, August 25, 2014

Review of Select group's first half 2014 financial report - The F&B business in Singapore

Business operations

Select group is in the F&B industry in Singapore. They own several restaurants such as the Peach Garden chain of restaurants, Texas Chicken fast food outlets, several catering businesses such as Stamford catering, Hong Kong Sheng Kee deserts, super tree dining at gardens by the bay and also the recent Chinatown food street etc. The business that generates the bulk of their profits is their Peach garden chain of restaurants.


Financial performance

During the financial result last year, Select group faced some headwinds due a small loss from its Texas chicken outlets. However, there may be some interesting developments in future days ahead. In the first half of 2014, both revenue and gross profit increased by 10.5% and 6% respectively as compared to 1st half of 2013. The final net profit increased by 53.7% due to a 1 Million government grant. As Select group is considered a SME in Singapore, they are entitled to government grants which helps these companies to increase productivity and grow stronger.

Challenges of the F&B industry

The food and beverage industry is labour intensive. In Singapore, not many people want to work in the service line as the working hours are long and the pay is relatively lower. As such, restaurants have to employ foreign manpower. But with the tightening of foreign manpower in Singapore recently, there is certainly some labour crunch for these labour intensive businesses which causes labour cost to go up.

In Singapore, the profit margins for the F&B industry is low as compared to other industries. Net profit margin is only about 3% for Select group. If we compare to Breadtalk group which is in similiar industry, their Net profit margin is only 1.7-2% for 1H 2014 which is also quite low. Breadtalk group's profit was lower as compared to last year as they had to close down some poor performing outlets. Select group manage to maintain and had a small increase in their profits.

The growth ahead

Select group's earnings per share (EPS) for 1H of 2014 is already 2.2 Cents as compared to only 1.41 Cents in 1H 2014. Throughout the past 3 years from 2011, the highest EPS was 2.93 Cents in FY2012. Looking at these figures, there may be a possibility that EPS will break the high of 2.93 Cents in FY 2014 this year if they are still able to produce good results in the later half of this year.

Chinatown food street

Select group also recently announced in May 2014 that they are planning to expand their business in south east asian countries. The first retail space was identified in Kuala Lumpur as a suitable location for the expansion of Hong Kong Sheng Kee desert into Malaysia. The expected operation date will be in September 2014. With more expansion plans to come, revenue and profit may increase by a huge margin in the future. Currently, all of Select group's operation is only in Singapore. With their many years of experience in the F&B industry, the venture into the overseas market may prove to be a good one.

Financial Valuations 

Is it a good time to invest in Select group now? Assuming the company made half the amount in the 2H as compared to the first half in 2014, EPS will be around 3.2 Cents (2.2 Cents in 1H 14 + estimate 1.1 Cents in 2H 14). This would mean a PE ratio of about 12x (current price 0.4 / EPS 0.033). Assuming a compound annual growth rate (CAGR) of 20%, the intrinsic value would be 52.5 Cents which means the current price of 40 Cents is undervalued and provides a margin of safety of  23.8%. But the question is will Select group be able to achieve a CAGR of 20%? If CAGR is 15%, intrinsic value will then be 39.9 Cents which is fair value for the current price of 40 Cents. For the past 10 yers, CAGR was calculated to be around 10% which means the intrinsic value would then be only 30 Cents.

The question we have to ask ourselves is will this company grow by 10%, 15% or 20% in the next few years? If they can continue to grow, which means most likely their overseas expansion plans succeed, the reward can be quite substantial. If not, there will be some more headwinds ahead. The current 40 cents is a good price only if they are able to grow at 20% or more for the next few years.

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1. Company in focus - Select Group


  1. Dear SGYI,

    Quoting your statement below,

    'Assuming a compound annual growth rate (CAGR) of 20%, the intrinsic value would be 52.5 Cents which means the current price of 40 Cents is undervalued and provides a margin of safety of 23.8%.'

    How do you obtain 52.5 cents? What formula do you use?

    Apologies if I am asking a stupid question.

    1. Hi,

      The intrinsic value is calculated using the discounted earnings model. Basically, we take the EPS and discount it to today's value. For the 1st year, it'll be 0.40 x (1÷(1+0.4)▲1). 2nd year it'll be 0.48 x (1÷(1+0.4)▲2). The 0.48 is derived assuming a cagr of 20%. Do all the way to the 10th year then add up everything and average it out. Using an excel spreadsheet will make it easier to calculate.

  2. wah. thats a crazy growth rate that you are assuminig. i wonder if you can comment on the individual segment, cause they dont really look like the sort that can grow at 20%, since that is like a starbucks growth rate. how long do you expect them to grow at 20%

    1. Hi Kyith,

      20% is indeed too optimistic. Their historical growth rate is about 10% so probably that will be a better figure. Only the overseas expansion if succesful will lead to higher growth rate. I was just listing out the possible scenarios and the valuations for each scenarios. We have to decide for ourselves whether it is a good price or not.