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Snack Empire – Crunch Time



Introduction

In 2003, Shihlin Taiwan Street Snacks opened its first pop up store peddling the beloved Taiwan XXL Crispy Chicken. The first Self-Operated outlet in Singapore was launched in 2004, and as one would say the rest is history. Fast forward to March 2022, the STSS brand is carried through a network of 233 Shihlin Outlets and Restaurants in Singapore, Malaysia, Indonesia, United States, Egypt and Cambodia.


The company IPO-ed on the HK exchange in Oct 2019 by offering 200 million shares at HKD$0.65 per share. The total number of outstanding shares remains at 800 million up till the time of writing. As you can see from the chart below, the share price has languished for years due to the outbreak of Covid-19 subsequently. And that has brought about a unique opportunity to invest in, in my humble opinion, an undervalued company.


Source: Yahoo Finance


Business Model for Snack Empire

The company runs the business in two basic models, (1) Self-operated model and (2) franchise and licence model. Model (2) is further broken down into (i) Single Unit Franchise, (ii) Multiple Units Franchise, (iii) Master Franchise and (iv) Master Licence.



Source: IPO Prospectus


Overview of historical performance

The historical trend of total Self Operated and Non Self Operated Outlets/Restaurants was evidently disrupted by the ensuing Covid-19 pandemic as shown below.



The restriction in movements caused a significant drop in both Non Self Operated (Franchisee/Licensee) outlets/restaurants and the revenue associated with this segment in 2021 and has recovered since.



This has impacted profits as well. Do note that the net profits in FY2021 and FY2022 were significantly supported by government grants.



Relative Valuation

In my opinion, Snack Empire is undervalued. This is evident when you look at various metrics. Let’s first compare the company with listed F&B companies based in Singapore. These are well known brands that are often seen in the shopping malls.


From my point of view, four out of the five companies derive majority of their revenues from restaurants which is different from the fast-food outlets that Snack Empire is managing. I would recommend readers to go through the industry analysis done by Frost and Sullivan that was included in the IPO prospectus. From there, you would be able to see that the breakeven period and investment payback period for the fast-food industry tends to be rather short, and Snack Empire performs better than average. The capital outlay required to open an outlet is relatively low.


Source: IPO Prospectus, Frost and Sullivan Industry Report


Due to the difference in business nature, I would regard Old Chang Kee as the closest comparison to Snack Empire.



As you can see, Snack Empire is comparatively cheaper when comparing on a Price Earnings ratio basis. It looks even cheaper when cash is net out from the price. The low Price to Book ratio is important to reduce downside risk. Please note that some of the figures are annualised based on the most recent semi annual financial statements, since this would likely be free of distortion due to Covid-19 regulatory restrictions and government grants.


In Oct 2019, there was a group of investors willing to fork out cash to invest in Snack Empire back then at HKD0.65 per share. Let’s look at the metrics back then, which includes proceeds from the IPO.



As one can observe above, all current metrics are looking better than it was at IPO. Isn’t it great to be able to invest into a company at a 42% discount compared to the IPO subscribers?


Is this the trough?

As can be observed from the financial statements, the profitability and revenue generated by the company have seemed to hit a bottom by FY 2021, which was in the thick of the Covid-19 pandemic. Since then, the total number of outlets and demographic exposures has rebounded, which included a foray in Cambodia, Egypt, and re-entry into East Malaysia via a Master Franchisee (there was a prior Master Franchisee whose franchise agreement expired in 2020). In December 2022, the company hired Esmond Han as Chief Operating Officer who would “oversee the business as it plans to grow aggressively in current and new markets”.



Source: LinkedIn


It does seem like the company is rekindling its ambitions that were meant to be fuelled by the IPO proceeds raised in 2019.


Cash Balance and its Significance

There have been arguments against taking into consideration cash balance on the books when valuing the company as a minority investor. Indeed, if one does not have control over the cashflow and the management is not shareholder friendly, there is little use for a cash hoard to these minority investors.


I believe this is not the case for Snack Empire. As mentioned above, the company seem geared up for expansion, thus part of this cash pile would be put to good use in these plans.


The company has demonstrated the willingness to dole out dividends. There is a dividend policy in place to hand out at least 40% of profits as dividends. Understandably, that was not done in FY2020 and FY2021 in lieu of the ongoing pandemic. For FY2022, the company gave out a bumper dividend of HKD 3.59 cents per share. For the financial period ending Sep 2022, the company distributed its maiden interim dividend of HKD 0.758 cents per share as a listed entity.




It would not be out of character if the company decides to distribute another Special Dividend for the period ending March 2023. If the company decides not to hand out a special dividend, by keeping up with the interim dividend and distributing the same amount would result in a 5.5% dividend yield. Being paid to wait is a plus!


I do not expect the full $24m cash balance to be distributed. However, going by the plans for IPO proceeds, the expansion plans would not require so much cash. In short, I do think that there is considerable chance that the company will return more cash to shareholders.


Wish List for an investor

From an investor point of view, I would like for the company to distribute more dividends to the shareholders, ideally fully paying out the remaining amounts in the share premium account. S$5million was paid out in FY 2022, leaving circa $12.1million in the share premium account. The remaining cash would be useful for its expansion plans.


Source: FY 2023 Interim FS


I hope the company’s franchises develops well in the United States. By virtue of the higher cost of living, the revenue per US franchise for FY2022 is an average of circa $80k. The number of franchises has slowly crept up to 6 as of FY2022 and 8 as per updated in the webpage.



Source: Shihlin Taiwan Street Snacks website


If the expansion in US goes really well, it will turn out to be a really big driver of revenue! Just look at how fast Chipotle grew after the first few outlets. Chipotle opened its first outlet in 1993, third in 1996, and 16 outlets by 1998 when McDonald’s invested. By 2017, Chipotle had nearly 2,300 locations. One can dream right?


The re-entry into East Malaysia seems to be on track with four franchises and active hiring posted on their website.



Conclusion

Snack Empire looks primed for expansion going by the trend observed in the number of outlets and restaurants the chain has in its network. With a healthy balance sheet that will cushion the downside, and growth catalyst from its expansion plans on the horizon, this is the kind of investment that I like. One with an asymmetrical return profile. I am personally vested in this company and would like to see it brings its famed XXL Crispy Chicken to the rest of the world. The Happy Ricebox happens to be a personal favourite! At HKD0.275 per share, it's a bargain not to be missed even if it takes some time to amass a position due to its limited liquidity.



Disclaimer: All posts on The Squirrel's Drey are for informational and discussion purposes only. This is not a recommendation to buy or sell securities discussed. Please do your own due diligence before investing.

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