Wednesday, 11 October 2017

Is This Stock Delicious Enough for Your Investment?

I recently got interested in Jumbo Group mainly due to its falling share price. I visited Jumbo Seafood Restaurant and JPot during festive season and family birthday celebrations. The food quality is good and ambience is friendly. Coincidentally, a relative’s wedding lunch was held in Chui Huay Lim Teachew restaurant, and I found the food really tasty.

Operations overview
Jumbo Group is a multi-concept F&B company with 16 restaurants in Singapore, 3 outlets in Shanghai, and 3 other joint venture/franchised outlets in Singapore, Japan and Vietnam, under 5 restaurant brands. It serves more than 1.6 tonnes of crab per day to more than 7,000 diners. 

(Assuming a conservative $90 per kg of crab, it generates $144k of sales per day, and $52m per year just from crab alone)

Financials overview

Jumbo's revenue has shown a nice increasing trend over past 3 years. This is not surprising given that they had been on an expansion mode since listing. 

EBITDA margin has been hovering between around the mid-teen percent. Likewise, its profit before tax has also increase from $15m to $18m a year. 

Its revenue, EBITDA and PBT have been increasing in tandem for the past 3 years: 21%, 17% and 18%. Likewise for Net Ops Cashflow, an increase at a similar level of +21% from FY14 to FY16. 

It seems that while Jumbo has been expanding overseas into China , it is doing so at a measured pace and has been managing its cost quite well, with growth in topline flowing down to its EBITDA,  earnings and cashflow.

I include FY17 figures up till Q3 here for ease of comparison:
  • Revenue, EBITDA, PBT: $106,902,000, $17,595,000, $14,191,000
  • Net Ops Cashflow and Free Cashflow: $7,423,000, $3,440,000
If we annualise the above Q3 figures, revenue, EBITDA and PBT would still beat last year's numbers although by a smaller margin. Does it mean that Jumbo's growth is beginning to plateau? Perhaps that was market's interpretation which explains the drop in price past few months.

Expansion Drive into China
From the initial one restaurant in Shanghai before IPO, Jumbo has expanded its footprint in China by adding 2 more outlets in Shanghai, and 1 in Beijing that just opened in Jul. China's share of total revenue has grown from 5.8% in FY14 to 17% in H1 FY17. 

Management is cognizant of fact that Singapore market is small and saturated, and the only way to grow is to go overseas. This has been their strategic direction since day 1. 

And the strategy to target the higher end segment of F&B, providing premium quality seafood to the affluent consumers in first tier cities at selected locations in upscale luxury malls, such as IFC in Shanghai Pudong and IAPM mall in Xu Hui District, and SKP in Beijing (Orchard Road, Marina Bay or CBD equivalent of both cities) have been executed well so far. It is done at a comfortable pace of 3 restaurant in 3 years, and more importantly without incurring a lot of debts. Business growth is reflected in the growing revenue, EBITDA, profits and operating cash flow. This is healthy expansion. 

And there is still a big balance of IPO proceeds for further expansion, as seen in Q3 report. Coupled with Jumbo's strong cashflow generation ability, this would enable the group to continue its growth without compromising its balance sheet strength. 

Competitive Advantage
The restaurant business is not complex, as far as investment analysis is concerned. Recipe for a successful restaurant business is essentially providing high quality food at a price that suits the spending power of target segment, maximise asset efficiency in serving diners, keep cost low, and replicate the success formula across locations. 

But the F&B business is competitive, due to the small local market that limits restaurant's scale of expansion. Existing operators have to constantly develop new ideas and creative offerings to stay ahead. The low barrier of entry also attract new players with similar concepts. Secondly F&B companies almost always have to venture overseas to seek further growth after local expansion has been maxed out. This has been the growth trajectory observed in other F&B companies such as Breadtalk, Tung Lok, Katrina etc. Inherently, there is execution risk, and F&B players need to maintain fine balance of adapting to foreign customers taste buds, and retaining restaurants unique identity and concept. 

I think that Jumbo would be able to implement its expansion plans well and grow into a regional F&B firm. Its record thus far has been good. My confidence is built on Jumbo's strong branding.

Firstly, it is not any typical restaurants or eateries that offer common, run-off-the-mill food. It has a verydistinct product offering as the only listed F&B player specialised in serving the de-facto national dish of Singapore: chili crab. And the dish, in itself, is already iconic which helped Jumbo to expand overseas successfully.

Jumbo's pricing and outlet locations further complemented its market positioning in consumers', tourists' and expats' mind as an upper scale restaurant serving good food worthy for festive celebrations, and the must-go destination to try the famous Singapore Chili Crab. 

I perceive its strong branding and association with chili crab plus its premium product had actually carve out a niche market in the competitive F&B landscape, which forms its rather formidable business moat. In some sense, it is much difficult for competitor to muscle its way into the high-end premium seafood segment with chili crab as the core product, compared to eateries offering japanese food, ramen, latest korean desserts, that are much more numerous in nature. 

Cost Structure in Detail
I look at Jumbo's cost structure for FY14 just prior to IPO period and its latest quarterly results, to find out if it has been keeping specific cost items well in-check despite its expansion past 3 years.

Its quite telling that Jumbo has been able to maintain its cost structure rather well. Most of its cost categories did not have big changes, and is being controlled at a similar percentage of revenue as per 3 years ago. In fact, the largest cost category COGS, has dropped from 38%  to 36.3%. Has it been able to source for better food and crab supplies at a lower cost with economies of scale?

However, understandably, the 2 important cost items for F&B operations have risen. Employees and Operating Lease Expenses increased from 27% to 28.7% and 7.9% to 9.5% of revenue respectively. These are not unexpected as the business is still expanding. In fact they have been managed quite well by with just over 1.6% increase, considering the revenue is 21% higher now. Hence I honestly would not flag them as a cause of concern.

In short, while Jumbo now incurred higher expenses to upkeep a much larger business operations, it is not having cost overrun in any areas and even the increase in operating leases and staff expenses have been managed well. 

And the management's successful experience in Shanghai should boost its odds of successful execution of growth plans in China market. 

Next post, I shall look at Jumbo's comparison with other F&B companies, and try to put a fair valuation to its stock price.

*Interested readers may also visit AlpacaInvestment blog, shareinvesetment, and Fundamentalsmatter for more info.

*Looking to initiate position in Jumbo. But before I completed my analysis, it has risen quite a bit. 

Monday, 18 September 2017

Manage Cash Holdings in Portfolio

I read yesterday’s Straits Times article ‘The best investors sit on plenty of cash’ with interest.

What are the roles of cash in your investment holdings?

Intuitively, cash gives you options during extreme market conditions. It means one can buy at depressed market price to average down, to build a position in a promising counter. In essence cash presents opportunity to reduce your losses, or increase your earnings when market recovers. 

Cash also serves as an anchor to your portfolio as its value is constant. It is a valuable tool from a trade execution stand point as described above. It also helps cushion the fall in portfolio value from a psychological stand point, reducing anxiety in investors and prevent hasty and erroneous decision making. 

However, to make full use of  cash during market downturn, one needs to have the capability of identifying the approximate low price point of your stock. More importantly, investor needs to buy fundamentally strong counters to make his bottom-fishing attempt worthwhile. 

This means changing one's mental attitude towards cash and not view it as a drag on your portfolio returns, but a valuable tool to earn you big returns. 

And fundamental analysis is a regular homework for investors. A good sense of general market conditions and broad understanding of industry dynamics help too. 

How much cash should one hold in your portfolio is then a personal choice. In general it falls within the range of 10% to 40%. I pick 15% at current market conditions which is slightly optimistic buy not euphoric yet, and may increase as market rises. Max could be 30% when STI hits 3,500. 

Some people go to the extreme level by holding 50% or even 100% cash. I would advise against that. While this might entail that that he has plenty of options on hand to cherry pick during market trough and make a killing subsequently, he may miss the preceding market rise.

Having a huge cash pile also messes with one's psychology. It takes an even greater mental discipline to sit still. And slight market movement may be amplified in his brain and trigger buy action due to eagerness to earn. This is a dangerous situation as the person is put in a position where he is always tested and tempted. 

And such extreme investment tactics require an even greater level of technical expertise and psychology maturity to deal with the uncertainty. Unfortunately many investors tend to over-estimate themselves in this area. 

Market is rational most of the time, and it is difficult to outsmart him. Hence we should not try too hard to beat him by adopting extreme cash management practices. Often, we should maintain one foot in the market, stay close and feel his pulse, and calibrate our decisions accordingly. There are times to buy, to sell, to trade, or to do nothing. 

Only during extreme market conditions then radical behaviours such as an all-in show hand is appropriate. 

Sunday, 3 September 2017

Is Tai Sin's FY17 Results a Cause for Concern?

Tai Sin Electric has been one of my long-term shareholdings since 2012/2013. Lets take a look at its latest Financial Year results that has just been released not long ago.

Overall P&L
Tai Sin has not had a great year in FY17. The total revenue, gross profit and operating profit have decreased as seen in table above.
As a cable and wire manufacturer, it is important to monitor copper price as it is the main raw materials for cable production. Tai Sin showed ability to navigate a rising copper price in last year by maintaining a constant gross profit margin at 20.6%.

But operating margin did not fare as well and we have a decreased operating margin in FY17.

Segment Revenue Breakdown

The largest business segment, Cable & Wire, suffered a 19.3% fall in revenue. In fact its $41.9m revenue reduction is more than the fall in overall revenue amount (see table above): $41.2m.

The second largest segment, Electrical Material Distribution, had higher revenue but its too small an amount to cushion the lower revenue in Cable & Wire.

Balance Sheet

Tai Sin is still in a net cash position with $22m of cash and $10m of short term borrowing. It is worth noting that short term borrowing decreased from $36.9m the previous year.
Trade receivables decreased by 21% compared to FY16.

Nothing unusual here.


The net cash from operations jumped from $8.4m to $37.4m in FY17. Looking at the changes in working capital, the line item with big change is the collection of trade receivables: $18.9m in FY17 versus -$21.2m in FY16.

Management’s comment as follow:

‘The net cash from operating activities of $37.42 million was mostly due to lower sales, lower purchases, lower bonus accrued, payment of gratuity and income tax during the year’

Management seems to have a negative view about the increase in ops cash flow and attributed it to lower business activities that leads to lower sales on credit and less cash bonus payment.

Nevertheless, it’s still a happy problem for Tai Sin that its main operation is highly cash generative, enabling it to pare down debts, acquire other companies or simply to maintain its dividends payment.

My Opinion

Its clear that the business environment has been difficult in the past one year based on the lower revenue and income. Management cited that this is due to ‘lower delivery to the Commercial & Residential, Industrial and Infrastructure Sectors as a result of completion of deliveries for the existing contracts.’

In my memory, such a narrative of a slowing residential, commercial and industrial sectors doesn’t seem to be new. When I looked back at annual reports since FY13, Tai Sin had voiced similar warning about the slowdown in local construction activities and sluggish economic performance affecting its top-line, and the only bright spot in the industry is the government-initiated infrastructural projects.

Yet the company had actually performed rather consistently. Its revenue and net income has been hovering around a tight band of $280m - $320m, and $20m - $27m respectively.

It seems that while Tai Sin is clearly aware of the industry challenges and been managing shareholders’ expectations by stating them explicitly, it has also done a good job keeping its business afloat.  

And looking at the local construction and civil engineering landscape, there is no shortage of projects especially infrastructural developments initiated by the government e.g. new MRT lines, T5, Tuas port. HDB flats are still being built on a large scale, with new residential areas in the pipeline such as Tengah.

While the industry is fragmented with small players, there is a market for Tai Sin’s product. It being a market leader, and with years of experience, should have no issues maintaining a stable revenue in a boring industry, barring a severe industry and economic downturn.

From a portfolio perspective, I bought Tai Sin as a dividend play to provide cash inflow. My yield on cost for this counter is a comfortable 9.8% based on dividend per share of $0.0235. Assuming Tai Sin is going to pay out dividends of $10.2m as per last year, it is well below the net operations cashflow of $37m.

Hence, I am not worried about Tai Sin’s reduced revenue and earnings. However, it would be a cause of concern if the results drop again next year. I shall monitor its quarterly report closely.

As of now, it should continue to sit in my portfolio and dispense cash to me twice yearly.

Thursday, 3 August 2017

Raffles Medical Q2 FY17

Raffles Medical (RM) just announced its Q2 2017 results.

Results Overview
At first glance, RM’s Revenue, Ops Income and Net Income for Q2 remained constant or showed marginal fall over Q1 respectively: 1%, -1.9%, -2.3%.

Its Net Cashflow from Ops of $23.6m is similar to the $23.8m in Q1.

Balance sheet remains strong, with $112m cash and only $53m loans and borrowings.

All in all, results seem fine.

But its share price is a different story. It dropped about 5% to $1.21 on 1 Aug, one day after its result release, and fell further to $1.185 on 2 Aug afternoon. That is about an 8% drop since result announcement.   

This piqued my interest. RM has been on my watch list for long and I am interested to know if this is a good chance to start accumulating the shares.

RM Traded at High Valuation
Market has high growth expectation on RM when its shares traded at an expensive PE ratio of 32x, based on share price of $1.3 before latest quarter results. It was priced very optimistically due to its growth prospect: soon-to-commence Raffles Hospital extension, RM’s 2 new hospitals in Shanghai and Chongqing etc. In other words, RM was expected to have a 32% growth in earnings in the coming year.

Compare this to the market benchmark STI ETF, which is only trading at PE ratio of 13x and its obvious that market was valuing RM richly.

Growth Momentum Losing Steam
So Q2 results showed stagnating growth. Management explained that this is due to softer than expected demand from foreign patients (I take this as the medical tourism trend slowing down), high staff costs and expenses for consumables used. Looking forward, management acknowledged that market conditions are challenging due to economic slowdown and increased competition.

We also read more specific details from analysts’ report. RHB shared that management opined the China hospitals could take up to 3 years before EBITDA turn positive. Despite full quarter rentals from RM Holland V, revenue from healthcare services fell 1.1%, implying bigger drop in healthcare service revenue.

Suddenly outlook turns murky and not so promising anymore.

I suspect the management is also caught off guard by the business slow down. Under point 9 in Q1 report where management was asked about any variance between forecast previously disclosed and actual results, management replied that ‘current financial period’s results showed a lower than expected revenue whilst the Group remains profitable’.

Let’s look at some numbers. The company’s growth momentum has indeed weakened considerably in recent quarters. If we look back 6 quarters, there is a clear trend of deteriorating revenue and profit from operations:

Q2 2017
Q1 2017
Q4 2016
Q3 2016
Q2 2016
Q1 2016
Y on Y Growth (%)
Profit from Ops
Y on Y Growth (%)

Share price reacted by dropping big in last 2 days as mentioned above.

Such is the pitfall of investing in high growth company. All is well and share price will keep rising, so long as the company can sustain its growth. However, when company shows signs of a slowdown, market would beat the share price down. The seemingly constant revenue and earnings growth quarter after quarter give the illusion that such growth can go on indefinitely, but we never know when will the growth taper off.

Ability to Control Cost?
So where do Q2 results leave RM with?

The key thing is to find out whether RM can execute its expansion plan well to sustain its growth, and concurrently control its cost.

Firstly, managing cost. We look at past 5 FYs’ revenue and operating income to derive its operating margin. It seems that RM has been able to maintain its margin quite well around 21%, until FY15 when it started dropping to latest FY margin of 17%.   Also, manpower cost, the largest component of RM expenses, has been creeping up to 51% of total revenue in latest quarter.  

Q2 2017
Q1 2017
Ops Profit
Ops Profit Margin (%)
Staff Cost
As % of Revenue

It seems to me that manpower cost will continue to be the largest component. And keeping it manageable is critical in maintaining RM’s cost efficiency.

As for China, I am even less certain about it. It’s a new market after all. Start-up costs would definitely be high in the initial years. While RM can hire local doctors and nurses which may come cheaper, company needs to invest in extensive training to enhance their service to a level similar Singapore. RM may also need some time to finetune its medical charges to suite local market’s spending power.

The only comfort here is RM is still able to increase medical charges due to the industry dynamics of healthcare inflation, but has to do it at a measured pace.

However, on the grand scheme of things, RM does have a clear expansion plan well-drawn out, with hospital expansion strategy mooted few years back to address the increasingly competitive market today. Overseas expansion plan is spearheaded by acquisition of MC Holdings to establish presence in China, Vietnam and Cambodia, followed by hospital development in China.

So its really down to the management’s execution now. Can RM pull off a successful expansion internationally and subsequent integration into its core business?

My Take
RM has always traded at high PE and that held be back from buying its shares for quite some time.

Recent drop in price triggered by the result could have been an opportune time to establish a position, provided if we can ascertain that the negative result is just a blip in RM’s growth story caused by a one-time event. But it is clearly not the case this time round, as RM is facing real challenges and much uncertainty in its expansion plans and earnings can be muted for a few years before improving. Establishing a presence in a new foreign market and navigating around obstacles such as foreign regulations, local residents’ tastes and consumption patterns, incumbents’ competition can be really tricky.

Having said that, I would still want to buy RM at a comfortable price. This stems from my confidence in RM’s management capability in growing it into the largest private healthcare player in Singapore, with the key person Dr Loo still helming the company. The company is also fundamentally strong, shown through its stellar performance over the years. 

Furthermore, healthcare industry, is promising in Asia with the mega trend of increasing affluence, a growing middle class in SEA and China that is increasingly health conscious, and ageing population that needs more healthcare service. The market is there for RM to seize.

But I will need to manage my risk well by buying at a lower valuation to cushion against future negative results. And market should not be as shocked at future earnings fluctuation as it is now, given senior management guidance and recent slowing growth.

I reckon that a PE of around 25, which, based on latest full year EPS of 4.04c which means a price of around $1, will be a more comfortable price range. PE25 is also at the lower range of its PE for the past 5 years.

I will further manage my risk, by splitting my capital for RM into 3 portion. By entering in tranches, it allows me to lower my overall purchase cost should price drops further. 

Thursday, 27 July 2017

Selling Decisions Made Simpler

Buying and selling are two sides of a successful investment. But selling can be tricky, especially when counter is deep in the money and investors are caught between realising profit or waiting for further rise.

Selling actually deserves much more attention in one's investment journey, but we rarely accord the same level of analysis and scrutiny to selling as per buying. It  is important as allows investor to recycle their capital into new counters/assets, or keep them in war chest for better opportunities. Sometimes it prevents loss from snowballing, and allow us to preserve our capital. Also, in the grand scheme of things, we need to take active steps in managing our portfolio as there is time to buy, to sell, or simply do nothing.

I analysed some of my recent share sales when it is in green but did not go as well as expected, and attempt to map out the different situations where I thought of selling. The decisions are compiled into a table characterised by judgement in 2 aspects: company fundamentals and price technicals. This table should help me make better selling decisions in future, and I hope it can be useful to readers too.

As an investor, company fundamentals should be the foremost consideration and one should analyse fundamentals first, with an eye on the expected, reasonable performance going forward. After all, buying into a company is essentially placing your faith in its ability to earn higher profits in future, so certain extent of prediction is required. Hence I have further segregated the 'Fundamentals' axis into good or bad future business performance.

For the 'Technical' axis, I am just looking at current price action and not attempting to forecast future movement.

How to make use of the table? First, look at the vertical axis and determine whether the company currently has good fundamentals. Then move on to horizontal axis to see if its price is currently on an uptrend or downtrend.

While the table maps out various selling considerations and help frame the thought process, it is by no means definitive. Investors would still need to make some judgement call with regards to company's present fundamentals and future prospects. For example, with a counter that is currently facing difficulties but its share price been rising, such as some small marine companies in the oil & gas sector, one will have to judge whether its future prospect is good with high possibility of turning around. That will then affect whether the counter should be sold or bought more.

Anyone thinks this can be used to guide selling decisions for some used-to-be-strong companies but now going through a rough patch? Eg. M1, Comfort, SPH?

Is This Stock Delicious Enough for Your Investment?

I recently got interested in Jumbo Group mainly due to its falling share price. I visited Jumbo Seafood Restaurant and JPot during festive ...