Summary
- Dramatically undervalued at 6.4x p/e.
- Investors getting a growth business at a mere 2.3x earnings excluding net cash on bal. sheet.
- Extreme undervaluation due to lack of communication of growth plans, and a dividend policy. Letter to founders/mgmt on remediation steps to unlock substantial value.
Since last year, this stock is on our radar following its IPO bust that made headlines in the media:
As an investor in Asia, Snack Empire Holdings (HKSE:01843) quickly gained our interest because its business Shihlin Taiwan Street Snacks that sells its signature fried chicken and other taiwan street snacks is popular in Singapore and Malaysia.
Founded in 2003, the restaurant chain has its first store in Singapore and has since expanded into more than 200 outlets and restaurants in Singapore, Malaysia and Indonesia.
More information can be found in the IPO Prospectus:
http://www1.hkexnews.hk/listedco/listconews/sehk/2019/0930/2019093000101.pdf
At its current price of HK0.21 or a market capitalization of SGD30mil, it is dramatically undervalued at 6.4x 2019 earnings of SGD4.7mil. Factoring out its net cash of SGD19mil, the investor is getting the business at a mere 2.3x earnings. In contrast, its direct peer, Old Chang Kee (SGX:5ML) is trading at 26.6x 2019 earnings. Even the HK-listed Yum China is trading at 35.5x 2019 earnings.
What is attractive about Snack/Shihlin is its huge runway for stores expansion. According to its IPO prospectus, Shihlin will continue to grow its store count at 20+% annually till 2023. With such huge growth prospects, both Old Chang Kee and Yum China dims in comparison, with annual store count growth at flat and high single digits, respectively.
Instead, we believe the most comparable peers for valuation comparison would be their western counterparts, Shack Shack and Chipotle. Both operate a chain of fast casual restaurants and have much higher growth rates than Old Chang Kee and Yum China.
In particular, Shack Shack is opening about 50-60 net new stores per year before Covid, or an annual increase of 30+% store count . Even with a collapse in earnings due to Covid pandemic, Shake Shack is currently trading at 60x 2019 earnings while Chipotle at 92x 2019 earnings. Snack' s valuation at 6.4x earnings is astonishing!
We believe such extreme undervaluation resulted from investors' inability to recognize Snack' s business prospects because too little information is made available and the fact that its business is located in Singapore, Malaysia and Indonesia while its stock is listed in Hong Kong.
With the two Founders having a 75% stake in the company that derives bulk of their net worth (and hence they are very incentivized to have the company stock trade at its fair intrinsic value), we have sent a letter to the founders, detailing a roadmap to increase shareholder value and their net worth.
Interested readers can access the full letter here:
The roadmap covers the following two important factors which we believe will result in the investment community to value the stock around its fair intrinsic value:
(1) Poor communication on Snack' s Growth Plans and Business Economics, and
(2) Lack of a Dividend Policy.
We urge them to look into both of these factors seriously and provide the remediation steps required to unlock value, by (1) having a comprehensive investor day presentation touting the company growth plans and the economics of Shihlin business and (2) instituting a 50% dividend payout policy.
With more information available on its 4-year growth plan, it would aid investors to make better judgment on Snack' s business and give an appropriate multiple that incorporates its growth prospects. We believe Snack will trade at a substantially higher valuation multiple, one that is at least in line with its peers, given its runway growth in store expansion, and earnings potential going forth.
Another important aspect of the roadmap is the implementation of a 50% dividend payout policy, or annual dividend payout of about SGD2.4mil based on their FY2020 earnings.
With a current cash position of SGD21.6mil (with negligible debt) and being largely profitable, the company has no issue financing its growth expansion plans, while at the same time paying out 50% dividend from current earnings for shareholder return.
At the current low share price, a 50% dividend payout would have a yield of 7.8% on its market cap of SGD30mil.
The sustainability of the dividend, would force the market to value the stock much higher based on a yield re-rate to what is available in the market. For example, a re-rate to a reasonable dividend yield of 2.4% in the stock market, Snack will be valued close to SGD100mil (HKD0.70 per share), a 3 to 4 bagger from its current share price of HKD0.21!
Disclosure: We, together with the entities we managed, are shareholders of Snack Empire (HKSE:01843).
