As most Singaporeans know, the local food & beverage (F&B) space is cut-throat industry. High rent and start-up costs, relative to the thin margins, are the contributing factors to why the industry is unforgiving. Naturally, with this mentality, local investors also tended to shun the sector entirely. 

However, investors that scour hard enough might just discover the hidden gem that most would let slip. ST Group Food Industries Holdings (ST Group), the latest of the F&B counters to list on the Singapore Exchange, could be on such prime example. 

About ST Group 

Headquartered in Australia, ST Group is an established F&B Group with a diversified portfolio of six internationally popular brands, namely, “PappaRich”, “NeNe Chicken”, “Gong Cha”, “Hokkaido Baked Cheese Tart”, “IPPUDO” and “iDarts”. Apart from its franchise, the group also developed two of its own brand concepts, “PAFU” and “KURIMU”.  

Financial Performance

In the latest FY19 results, ST Group grew revenue by 42.9 percent to A$52.1 million. This was achieved through higher retail sales from outlets, and higher sales of supplies to its sub-franchisees and sub-licensees. In the year alone, the group almost doubled its owned store counts from 24 to 41, while sub-franchisees and sub-licensees rose from 49 to 65. 

As can be seen from its results as well, ST Group does not seem to be impacted as much by similar challenges faced by F&B operators that concentrate operations in Singapore. For instance, rental on operating leases and staff costs amounted to A$21.8 million, accounting for 41.8 percent of its top line. On the other hand, also local-listed Japan Foods Holdings, saw similar costs accounted for 71.3 percent of revenue in their latest 1Q20 results. 

Excluding IPO expenses, ST Group saw its core net profit rose by 46.5 percent from A$2.7 million to A$4 million during the financial year. This would represent a decent net margin of 7.7 percent in FY19. Comparatively, Japan Foods only achieved about 4.8 percent net margin in its latest 1Q20. 

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High Valuation Befitting Its High Growth Profile

Equipped with fresh funds upon its listing in July 2019, ST Group would be well positioned to further its expansion. As of 20 August 2019 (barely 2 months after FY19), ST Group added 2 owned outlets and 5 sub-franschisees/sub-licensees operated outlets to make up a total store count of 113. 

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Balance-sheet wise, ST Group held about A$3 million in total borrowings, compared to cash balances of A$6.1 million pre-IPO. This would translate to a net cash position of A$3.1 million as of FY19. Post-IPO, the group raised a further A$9.6 million to grow and fund expansion.  

ST Group is currently trading $0.275, roughly around its debut price of $0.28 (IPO price at $0.26). At the current valuation, we compute a price-to-earnings multiple of about 36 times, based on the enlarged share capital base.  

Though we cannot say that the stock is cheap per se, we think its valuation befits its high growth profile.

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