Soup Restaurant Group Ltd (SRG), a Singapore based investment holding company engages in restaurant operation industry in Singapore, Malaysia and Indonesia. The Group operates a chain of restaurant outlets of a total of 19 outlets in Singapore and Malaysia as well as a franchised outlet in Indonesia. The Group operates in various segments which mainly, the operations of restaurants which sells food and beverage products to the public and also involved in food processing, distribution and procurement activities. Under the Group’s corporate structure there are Soup Restaurant Singapore Pte Ltd, Café O Singapore Pte Ltd, Pot Luck F&B Singapore Pte Ltd, Soup Restaurant Investment Pte Ltd with subsidiary of SRG F&B Malaysia Sdn.Bhd and Samsui Holdings Pte Ltd with subsidiaries of Sure Food Pte Ltd and Samsui Supplies & Services Pte Limited. Soup Restaurant Group Ltd was founded in 1991 and is based in Singapore (Soup Restuarant Group Limited, 2018).
Future outlook of Soup Restaurant Group Ltd. Soup Restaurant Group Ltd anticipate that Singapore F&B industry will remain highly competitive and challenging. The Group intends to continue increasing its product offerings, streamline its processes to achieve economies of scale and managing of rising costs and with its vision of keep on growing till SRG reaches 100 years. (Soup Restaurant Group Limited, 2017).
F&B industry vital to economy. The Food and Beverage (F&B) industry plays an important role in Singapore economy, leading Singapore as one of the Asia food hubs. Singapore F&B services had flaunted positive outlook since/from January 2017, Ministry of Trade and Industry (MTI) reported the food services sector grew, by boosting in sales volumes at food outlets, restaurants, and other eating houses (Ministry of Trade and Industry, 2018). With consumer discretionary analysts forecasting of a positive growth of 13.50% for the sector, this can be seen as a good sign for the industry (SGinvestor.io, 2018).
Applications gratify food services to expansion. With the increase of food delivery applications such as Honestbees, Deliveroo, Food Panda etc. Food services expanded their scope of reaching out to the consumers by using third parties to deliver food to their homes, this enable companies to engage with its customers through different platforms which is a key factor for the industry growth. Furthermore, with the projection of population of 5.8million to 6.0million people by 2020 (National Population and Talent Divison, Prime Minister's Office, 2013), this is a strong sign that the demand of food will increase adjacent with the population growth and boost the sales in F&B industry.
Increases in wealth and willingness in spending on food. Household expenditure survey in 2013 has shown that food and food serving services have growth by 63.95% since 2003. In tandem, the tendency of consumers having to dine out has increased since 2003, the spending on food serving services expended exponentially compare to the overall household expenditure. With consumers increase in wealth and willingness in spending on food its presentiment that this can increase the sales in the food services sector (Department of Statistics Singapore, 2013).
Unforeseen closure of outlets led to revenues fall. In FY16, revenues have a decrease of S$2.6million or 6.4% largely due to the loss of revenue from the unexpected closure of three outlets due to refurbishments and relocation plans. However, SRG open new outlets saw a positive outlook in the second half of FY16, which the Group achieved in increasing of revenue by S$1.8million and revenue from food processing, distribution procurement segment also increased by 14.9%. In addition, the Group managed to hold its results consistenty with different measures such as managing costs (Soup Restaurant Group Limited, 2017).
An accretion in SRG ‘s Net Profit Margin (NPM) from FY15 to FY16 indicated that the group is generating a relatively decent net profit from a dollar of its revenue (fig. 1). Despite an overall fall in the revenue in FY16 due to the unexpected closure of outlets, net profit was 0.04% higher at S$996,505 in FY16 compared to FY15 of S$967,508. This is due to the reducing cost of operating expenses as a result of the closure of outlets. Future cost is expected to maintain at around 23.0% of revenue compared to FY16 as SRG continue to tighten costs control and managing the raw materials used for their operations by sourcing other resources (Soup Restaurant Group Limited, 2017), Furthermore, projecting that the FY18F margins to increase as revenue increases while maintaining or decreasing in the operating expenses. This shows that SRG is efficient in converting its revenues into actual profit and in managing its cost.
ROCE grew 0.77% from FY15 to FY16 (fig. 2) although SRG’s revenue dipped compared to FY15, its ROCE increases from 10.59% to 11.36%. Despite having lower capital employed in FY16, SRG is able to be more efficient compared to FY15 with higher capital employed. It suggests that SRG is improving on the job of deploying its capital by growing earnings and concurrently reducing working capital.
Return on Equity improved by 1.58%. (fig. 3) Although the revenues have dipped in FY16, the net income of SRG has increased from S$967,502 to S$996,505. It suggests that SRG has been making changes in their policies as their efficiency of the revenue increases in FY16. However, the increase is due to increase in net income and the decrease in total equity due to mainly paying dividends and share buyback of S$2.2million (Soup Restaurant Group Limited, 2017). Furthermore, with basically no debt SRG’s profits is mainly driven by equity capital which is a positive sign for SRG.
Contraction in SRG’s liquidity (fig. 4) decrease in the current ratio from 2.45 FY15 to 2.02 FY16 due to the decrease in cash and cash equivalents of S$0.7million and decrease of S$0.8million in other receivables mainly due to the utilisation of bank guarantees for security deposits. The decrease in cash and cash equivalents was mainly due to purchasing of plant and equipment of S$1.1million and the dividend paid of S$1.6million in FY16. In addition, the increase of current liabilities mainly was due to provisions made for new and existing outlets and the increase in finance lease payables (Soup Restaurant Group Limited, 2017). Similarly, for the quick ratio (fig. 5) it decreases from 2.41 to 1.99 due to the reduction in current assets and the increase in current liabilities. Furthermore, the decrease in the inventories causes the quick ratio to dip further. However, the reduction of cash and cash equivalents and other receivables in FY16, SRG is still in a healthy state of almost 2x assets than its current liabilities.
SRG’s receivables remain constant while payables lengthen. (fig. 6) The slight increase in trade receivables and the decrease in sales revenue led to the increase in days of trade receivables from 4 days FY15 to 5 days FY16. This might be SRG wanted to boost its sales and introduce a longer payments date for its consumers. The management of SRG stated that no impairment allowance is needed as those trade receivables are past due but not impaired (Soup Restaurant Group Limited, 2017). With receivables received in averaging 5 days compared to SRG’s payables averaging 56 days, SRG is in a strong position to pay its payables. The increase in trade payables from 53 days FY15 to 56 days FY16 suggest that SRG will have more cash flow to create more business opportunities and with SRG holding onto the cash longer, it will increase its investment potential, however 3 days is not a significant increase. While having inventory turnover remain the same of 8 days as FY15, with reduction in its inventory and still able to provide sufficient resources to its consumers it suggests that SRG is managing efficiently and effectively in turning over their inventories quickly without losing precious opportunities.
With SRG having a negative cash conversion cycle of -43, it shows that SRG can efficiently convert their resources into cash in the result of having no issues in receiving cash from its customers and manage to turn over their inventories quickly while having a longer period to pay their supplies. This suggests that SRG is a strong candidate and efficient in managing their resources.
Increase in debt to equity (fig. 7) by 0.17% from 2.63% FY15 to 2.80% FY16 due to the addition of finance lease payable of S$21,654 with an effective interest rate of 5.63% and the decrease in retained earnings of S$623,502 (Soup Restaurant Group Limited, 2017). This is seen where SRG’s interest expense has gone up by 266. However, even with the slight increase in the gearing ratio, SRG’s level of debt is still significant small and this indicated that SRG is still in a good position where they can pay off their interests and debt obligations with a high-interest coverage ratio of 3,988.
Increase in EPS. EPS growth from (fig. 8) 0.34 FY15 to 0.35 FY16 due to the increase in the net profit of 3%. This indicates that SRG is more profitable in FY16 compared to FY15. However, there is a share buyback of S$2.2million in FY16 (Soup Restaurant Group Limited, 2017), which is also the cause of the increase in the EPS but in the case of consideration if SRG did not buy back shares using FY15 no, of shares outstanding, the EPS will still be 0.35 which clearly shows that SRG has been more profitable than FY15, despite of unexpected closure of outlets in FY16. Furthermore, the opening of 5 new outlets in the second half of FY16 led to an increase of S$1.8million in revenue and increased of 14.9% from its food processing, distribution and procurement arm while streamlining its processes and managing costs (Soup Restaurant Group Limited, 2017), this may suggest that SRG is able to increase their stream of revenue while reducing expenses thus, it is highly possible that there will be further revenue growth and margin expansion and EPS will further increase in FY18F which is a good sign for SRG.
Higher P/E than the market average. There is no significant change in the P/E ratio comparing FY15 P/E 54x to FY16 P/E 53x. (fig. 10) Comparing SRG’s P/E of 53x to P/E of the average market of 22.6 P/E, (disregarding to the P/E of SRG stated in (fig. 10)), SRG is overvalued based on earnings compared to the market. However, this also may suggest that investors are willing to pay more for what the company is earnings. Furthermore, despite having a lower EPS, FY15 has a higher PE ratio. This may indicate that investors have more confidence in the future prospects of SRG and expect enhanced earnings growth as seen in FY16.
The food services sector expected to expand in the future and increasing in wealth and willingness in spending by consumers in favour of SRG growth in the long run and with SRG improving on their ROCE and ROE, it shows that SRG has the capability and efficiency in boosting their profitability while simultaneously reducing their working capital, which putting SRG in a strong position that is capable of increasing wealth in a short period of time. Furthermore, SRG’s cash conversion cycle being negative also shows that SRG is a strong candidate in converting resources into cash. Moving on, SRG’s EPS has being growing at a constant pace, which indicate SRG has been more profitable than before. Catalyst including incoming revenue of opening restaurants and new concepts which increase SRG’s revenue by 1.8million. However, by comparing the P/E ratios of SRG to the market it shows that the stock is currently overvalued Therefore, encourage and recommend existing shareholders to HOLD their current position.