Thursday, July 13, 2017

Recent Action - Katrina Group

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.


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13 comments:

  1. Thanks for sharing! Just checking, if you buy the shares over a few days, wont it incur the sales charge? Or is there a way to avoid this charge? Thanks!

    ReplyDelete
    Replies
    1. Hi Anonymous

      Yeah i have to incur a couple of the sales charge, cant help it :)

      Delete
    2. aslamu alaikum wr wb..
      bismillahirrahamaninrahim,,senang sekali saya bisa menulis
      dan berbagi kepada teman2 melalui tempat ini,
      sebelumnya dulu saya adalah seorang pengusaha dibidang property rumah tangga
      dan mencapai kesuksesan yang luar biasa, mobil rumah dan fasilitas lain sudah saya miliki,
      namun namanya cobaan saya sangat percaya kepada semua orang,
      hingga suaatu saat saya ditipu dengan teman saya sendiri dan membawa semua yang saya punya,
      akhirnya saya menanggung hutang ke pelanggan-pelanggan saya totalnya 470 juta dan di bank totalnya 600 juta ,
      saya sudah stress dan hampir bunuh diri anak saya 3 orang masih sekolah di smp / sma dan juga anak sememtarah kuliah,tapi suami saya pergi entah kemana dan meninggalkan saya dan anaka-naknya ditengah tagihan hutang yang menumpuk,
      demi makan sehari hari saya terpaksa jual nasi bungkus keliling dan kue,
      ditengah himpitan ekonomi seperti ini saya bertemu dengan seorang teman
      dan bercerita kepadanya, alhamdulilah beliau memberikan saran kepada saya.
      dulu katanya dia juga seperti saya setelah bergabung dengan K.H. Tambring Abdullah hidupnya kembali sukses,
      awalnya saya ragu dan tidak percaya tapi selama satu minggu saya berpikir
      dan melihat langsung hasilnya, `
      saya akhirnya bergabung dangan mengunjungi website di www.danainstan.xtgem.com semua petunjuk K.H. Tambring Abdullah saya ikuti dan hanya 1 hari astagfirullahallazim,
      alhamdulilah demi allah dan anak saya,
      akhirnya 5m yang saya minta benar benar ada di tangan saya,
      semua utang saya lunas dan sisanya buat modal usaha,
      kini saya kembali sukses terimaksih K.H. Tambring Abdullah saya tidak akan melupakan jasa aki.
      jika teman teman berminat, yakin dan percaya insya allah,
      saya sudah buktikan demi allah silakan kunjungi website di www.danainstan.xtgem.com atau KLIK DISINI

















































































































      Delete
  2. This comment has been removed by the author.

    ReplyDelete
  3. Hi MR Sir, M1 seems like good price currently at 2.04. Meanwhile Comfortdelgo still high at 2.28. I am waiting for either M1 at <=2.00 or like your queue order comfortdelgo at 2.20. i guess we just still gonna wait?

    ReplyDelete
    Replies
    1. Hi Sheng

      It depends on how you see M1 right now. Outlook is bleak but I thought valuation is rather cheap so gotta be patience with that.

      Delete
  4. Hi Brian,
    Thank you for sharing Katrina:-)

    I was upset that i didnt get Kimly Group during IPO & its price didnt drop near to IPO price.
    Then i saw Katrina in your blog:-)

    Best Rgds
    David

    ReplyDelete
    Replies
    1. Hi David

      Like you, I also missed to get the kimly during ipo :(

      Delete
  5. Hi B,

    Is there a reason why u dun compare Jumbo in the peers comparison ??

    ReplyDelete
    Replies
    1. Hi SI

      No particular reason, i think Im lazy and should include jumbo and probably breadtalk and kimly too. Too many in this category hahaha.

      Delete
  6. Hi SI & Brian,
    I am not a good investor & just my 2c.
    Yes, Breadtalk & Jumbo may classified under 'Growth' stocks, hence their valuation [e.g. P/E, P/B] are very high.

    I read Breadtalk has many properties:-) Recently, they just sold off 1 of their property. Cashflow is very good. As most of their business are transacted in cash.

    David

    ReplyDelete
    Replies
    1. Thanks David for the insightful thoughts.

      Delete
  7. Just an update on this:

    Divested at $0.185, which represents about 7% loss.

    Was disappointed to see the earnings result despite the increasing no of outlets, margins was further depressed as the company tries to move from the traditional eat-in to online delivery model. Seems though instead of bringing in additional revenue through the online delivery it seems cannibalizing the eat-in numbers.

    In view of this, and the fact the company still engages in opening more stores at a poor margin, divesting and documenting as a lesson to learn.

    ReplyDelete

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