Real business is tough. If you think investing in paper assets is tough, real business is even tougher.
Non-much so then the retail food business. It makes it even worse that in a world where money is cheap, it has made wages, rentals and other cost more expensive.
This recent IPO by Jumbo Group is much anticipated, probably because it connects with many Singaporeans (We love our food) but also that we have so few IPO in recent times, this one sticks out well.
In this IPO, Jumbo Group will do a placement and an initial public offering of 160 million shares at $0.25 cents, to raise possibly $40 million.
The total number of shares of this final entity will be 641 mil shares with 160 mil shares offered to the public.
The excerpt below is how they intend to use the IPO money being raised:
From the prospectus, Jumbo Group will put out 4 more F&B outlets. They have also plans to better equipped their central kitchen.
Here is the profit and loss statement of Jumbo Group the past 3 years:
For the past 3 years, the profits look well. Certainly, it will be difficult to have a good IPO showing if the results look bad.
The caveat for new IPO speculators or investors is that for some companies, they tried hard to have a good set of financials, go for IPO and then for the operating environment to be more challenging. What happens afterwards is that the losses or poor profits show up after the IPO.
The PBT Margin for the 3 years are 10%, 10%, 14%.
The revenue growth for the 3 years are 11% and 14.7%
The profit growth is 25% and 44%.
Results are splendid.
If we add back the depreciation expense, the EBITDA for the past 3 years are $10.5 mil, $12.7 mil and $18.7 mil
The EBITDA Margin for the past 3 years are 12%,13%, 16%
The capital expenditure table is useful. It lets us assess the kind of maintenance capital expenditure for the business. Except for the lease hold industrial building, likely for the central kitchen, the capital expenditure looks to be around $3 to $4 mil,
With that we arrived at a free cash flow of 6.6 mil, 8.9 mil, 12.7 mil.
The interesting thing about the free cash flow is that it matches quite well with the net profit above.
The following is the balance sheet:
The Invested Capital is calculated using this formula: Total Assets – Current Liabilities – Excess Cash
Since their current assets is more than current liabilities, all the cash are excess cash.
The invested capital for the 3 years are $4.2 mil, $3.7 mil and $6 mil.
This is crazy. Their profit is more than their invested capital!!
If you look at the cash flow statements, the net cash add to the cash holds are $2.3 mil, $8 mil, $9.9 mil. The total net add is $20 mil!
The current cash holdings is $47 mil.
Why do they need to raise $40 mil?
Comparison to other F&B Businesses
You have the choice to buy Jumbo, or a better or weaker businesses. This means you don’t have to force yourself to buy Jumbo, when there are a better and cheaper business around.
So who are the competitors? Here are the following:
- Tung Lok – You guys might have been to their restaurant
- Pavilion – Sharks Fin restaurant
- Japan Foods – Owns much of Ajisen Ramen
- Bread Talk – Owns restaurants under their segmental (should be the likes of Dian Xia Er)
- Old Chang Kee
- Soup Restaurant
For this part, I am too lazy to take a look at some companies like Soup Restaurant but leverage on some data that I have it in the past.
To make it simpler for you guys,I consolidate the data on top here:
Tung Lok share price past 15 years.
A look at the profit history for the past 5 years shows how challenging running restaurants are. Certainly not as profitable as Jumbo Group.
Pavillon in the past have shown to pay a sizable 8-9% dividends, so you cannot say I wasn’t interested in it. Unfortunately, its a business where I have reservations whether they can have a consistent cash flow to pay the required dividend.
From the revenue history and profit history, they do not seem to be a benefactor of an improving economy the past years.
Japan Foods is one company I just happen to have some segmental data. Japan Foods is one company that have shown some quality growth and a share price that rewards the shareholder.
Japan Foods has a comparable Profit Before Tax margin as Jumbo Foods. However Japan Foods have a better EBITDA Margin than Jumbo Group.
If there is one company that you should compare in terms of performance, it is with Japan Foods. From what I understand, Japan Foods latest earnings was much lower. This reflects how challenging this line of business is.
Despite some great growth in the past for the restaurant segment of BreadTalk’s business, margins have been going down from very impressive to less than Japan Food. Jumbo Group currently have much better PBT Margins.
The weakening in margins can be a sign of higher cost of operations. Great revenue growth past 2 years as Jumbo Group, but margins and return on assets are not what they used to.
It certainly makes Jumbo Group looks good
Old Chang Kee
For Old Chang Kee, the PBT Margins are weaker than Jumbo Group but the EBITDA margins are comparable. The past 3 years profit growth is similar to Jumbo Group.
Put it against its competitors, you can see Jumbo Group quality. Other than Japan Foods, its margins and growth are better than Tung Lok, Pavillon, BreadTalk Restaurants segment.
However I should caution about IPO. If you look at the competitors, especially the change in profit before tax, the businesses do show profit falls from time to time. In the case of Tung Lok and Pavillon, if the F&B businesses do not watch their costs, losses are possible.
At 641 mil shares at $0.25, this puts market cap at $160 mil. At $13.7 mil PBT, this puts PE at 11 times or a 9% earnings yield.
With a net cash of $46 mil, this puts Enterprise Value at $114 mil. The EV/EBITDA is 6 times.
In terms of valuation it is not expensive. However, we have to think about the consistency of the earnings and EBITDA. If we have a longer operating history, we could have assess the quality of the cash flow. If its just three years of good times, then perhaps its not so cheap.
I can’t shake the idea why they would want to raised cash to expand when the business does not expand so much cash.
Businesses IPO to enable owners to cash out. If you got good money, why let others earn it with you unless you need them. In this case, for me it doesn’t add up.
Some how Jumbo Group reminds me of Neo Group. Core business looks good but I would rather not buy it at IPO just to err on the safe side. Let it some time to run business show some business metrics.
If I missed it then I missed it. If things gets more expensive its Ok,
If this is a business that shows 10 year of solid performance going forward, even if its 15 times PE its a good purchase.
However, if its just 3 years flash in a pan, at least we didn’t rashly get into it.
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