RE&S Holdings
Price target: RHB Bank Singapore ‘unrated’
Strong cash, high yield
RHB Bank Singapore’s Alfie Yeo has flagged RE&S Holdings as a strong cash flow-generating F&B company that is now trading at an undemanding valuation while maintaining a steady dividend record thanks to its net cash balance sheet.
RE&S runs multiple F&B brands with a total of more than 70 outlets in Singapore and Malaysia. The brands include Ichiban Sushi, Kuriya Japanese Market, Ichiban Bento, Kyakiniku-GO, and Gokoku Japanese Bakery.
“We believe the outlook for the F&B segment will be more robust as the Singapore economy improves and we see earnings growth led by new outlets and concepts,” says Yeo in his unrated note on Nov 23, referring to brands such as Mr Donut.
According to Yeo, the company’s new growth strategy is to focus more on the so-called quick service restaurant segment, which is less reliant on service staff, thereby helping to tackle rising labour cost, which already accounts for 37% of the company’s operating cost. “QSR outlets tend to be more
cost-efficient on labour and have better demand and outlet performance for better margins,” says Yeo.
With better-than-expected pickup in GDP growth of 3% seen next year, up from the 1.5% expected this year, Yeo believes this will be a positive on Singapore’s food service retail sales outlook.
Citing Singapore retail sales for the F&B sector, restaurant sales have recovered to near pre-pandemic levels. Yeo attributes the improvement to the lifting of post-pandemic restrictions as supermarket sales normalise and consumption shifts towards the food service sector.
“We believe RES is well placed to capture the more positive outlook in F&B spending next year,” he reasons.
While RE&S is planning more QSR outlets, which offer more “compelling value” to customers, Yeo believes that there is more “scope” for the mainstay full-service brands, although the high casual and premium market segments should not see similar rapid growth, given how these segments have been deemed by the management to have already matured.
In FY2023 ended June 30, RE&S reported revenue of $174 million, up 12% y-o-y, thanks to higher sales following the lifting of restrictions and new outlets. Gross margins improved 0.8 ppt to 72.7% due to lower food costs for some QSR concepts. ebit margin, however, fell to 8.8% from 11.1% largely because of higher labour costs but also higher utilities. As a result, earnings dropped by 19% y-o-y to $8 million.
Cash flow-generating ability remained strong despite a fall in net profit, says Yeo, who points out that F&B retail is a cash-generating business and RE&S generates operating cash flow of around $38 million to $44 million each in