Snack Empire (HKSE:01843): A 3 To 4 Bagger Stock! Letter To Founders/Mgmt

 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:

https://www.bloomberg.com/news/articles/2019-10-23/wild-hong-kong-ipo-turns-188-gain-to-loss-in-less-than-an-hour

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

Since its IPO at HK0.65 per share, the shares are in a precipitous decline even before COVID-19.

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:

https://documentcloud.adobe.com/link/track?uri=urn:aaid:scds:US:d793c35e-193f-42f2-ae4c-0eeabe946fe9#pageNum=1

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).

Western Union - A Compelling Investment

Introduction

Western Union (WU) is the largest money transfer company in the world. They are 5 times larger than their next competitor which is Moneygram (MGI). They have been operating since 1851, and been through many radical market innovations which they have to reinvent themselves in order to stay relevant. They used to be the largest telegraphy service company in the world last time, and had evolved totally into the money transfer business as the previous business had gone obsolete.

Competitive Advantage

A business with terrific economics comparable to See's Candy! They earned extremely high FCFs, due to the fact that they need only little for reinvestment while their business model allows them to constantly scale up. Average capex is only about 11% of operating cash flow, and despite their high payout ratio of almost 85% (shares repurchase & dividend), they can constantly grow their business and spend on acquisition.

The only ones that can compete with them are the big banks who are going into the money transfer business they are in. For example, wells fargo recently announced they are going into it also. However, the competitive advantage of Western Union is such that they provide money transfer service to the unbanked, underserved customers, esp in the emerging markets.

Not all customers have access to banking facilities, the way that many of us do. Hence, they have to rely on money transfer companies like Western Union for their remittance. Even the big banks now are partnering with Western Union, as their massive operation, economies of scale and reach do not make sense for the bank to come up with a service on their own.

Income Statement

	2011	2010	2009	2008	2007
Rev	5491	5193	5084	5282	4900
Adj. OI	1432	1360	1354	1355	1322
Op Margin	26.1%	26.2%	26.6%	25.7%	27.0%
Adj. NI	1145.9	957.2	922.5	909.3	847.3
EPS	$1.81	$1.43	$1.32	$1.23	$1.10
Net Margin	20.9%	18.4%	18.1%	17.2%	17.3%

Taking a look at their past 5 years earnings, they have a slight decrease in operating margin from 27% to 26.1%. Even with this decrease, they managed to earn a respectable net margin of 20.9% in 2011, compared to a margin of 17.3% in 2007. Lets take a look further at their key indicators below:

	2011	2010	2009	2008	2007
C2C	225.8	213.7	196.1	188.1	167.7
Growth	34.6%
Business	425	404.9	414.8	412.1	404.5
Growth	5.1%

Their transaction volume has increased 34.6% over the last 5 years for C2C, and 5.1% for business segment. Even though they did this by reducing fees, they still managed to maintain their margins and profitability. They only way they can do so is by driving down their own operating costs.

Competitor analysis

	Competitor	Revenue	OI	NI	Op Margin	Net Margin
1	Western Union	5491	1432	1146	26.1%	20.9%
2	Moneygram	1248	143	59	11.4%	4.8%

Take a look at the comparison of Moneygram, their closest competitor to Western Union. They are simply being crushed by Western Union as they cannot afford to fight the price war being the much smaller player.

An obvious metric to use would be their margins. WU has more than twice the operating margin of MGI, even though they are in the same busness, which shows their cost is substantilly lower.

Net margin is almost 4 times that of MGI, showing their leverage on their economies of scale.

Valuation

	Projecting Investment Return
1	Dividend	0.5
	Yield	4.18%
	Shares Repurchase (end 2013)	750
	Yield	10.39%
	Total Yield	14.57%
2	Operating CF	1129
	Capex	125.1
	FCFs	1004
	FCFs Yield	13.9%
	Capex/OCF	11.1%

Current management projection for 2012 EPS is $1.65, which translate to a p/e of only 7.24.
The lowest p/e they ever trade was during the subprime crisis which is at 7.93, still higher that the projected.
Average p/e over the years is about 15 at least.
Dividend yield is at 4.18% after the increase, and the dividend payout ratio is only at 30%.
Share repurchase of 10.39% outstanding shares till end of 2013, which will boost EPS by almost 11.1%.
Total yield calculated as per above would be at least 14.57%
If FCFs method is used, their yield would be about 13.9%.

We would expect them to at least trade at the pe of 15, which represents an upside of more than 100% to current share price. Competitors are trading at average of 15 - 22 p/e.

Shareholder Value

	2011	2010	2009	2008	2007
Repurchase	804	581	400	1315	727
Total	3827
Dividend	0.31	0.25	0.06	0.04	0.04
Abs.	196	167	42	30	31
Div Payout	16.8%	18.4%	5.0%	3.2%	3.6%
Total Payout	1000	749	442	1344	758
ratio	85.8%	82.3%	52.1%	146.3%	88.4%

As the need for capital reinvestment is little compared to the tremendous cashflow they earning, management can constantly create shareholder value by repurchasing shares and increasing dividend payout.
Take a look at the table on shareholder value, in the past 5 years, they have repurchased a total of 3.8 billion worth of shares!
Payout ratio is on average 85%, and even with such high payout, they can constantly grow their business and spend on acquisition.
With the recent drastic drop in share price, we believe Western Union is a compelling buy for the long run. We have a market leader with a See's Candy like business economics, shareholder friendly management, and plenty of growth opportunities in the emerging markets.

What more does investor wants?

AIG, BAC Warrants - Bruce Berkowitz's Thoughts

We have just read Bruce Berkowitz's semi annual letter and was more than glad to see him discussing about the long-dated warrants that we have mentioned in previous posts.

Here is the snapshot of the returns that he is projecting for the different warrants:

Source: http://www.fairholmefunds.com

Both AIG and BAC warrants are high up on the list, offering returns of 752% and 592% respectively.

We have used even more conservative growth rate than his suggested 10% growth in book value through the years. What is interesting here is that Hartford warrants have almost the similar returns as AIG warrants. We will probably do some work on it.

On investing in the warrants, we always have people asking us how come then with such returns, well known value managers are not putting their money in the warrants but instead in the common stocks?

The reason is they can't. There is simply not enough volume of warrants out there in the market for them to buy. Bruce himself already holds close to 25mil of the 75 mil outstanding AIG warrants. That is almost 1/3 of the entire float!

But for retail investors, that is a different case altogether. We can instead buy in to these warrants and hold on till expiry and chances are, you will be getting a huge paycheck at the end!