08-08-2015, 11:58 PM
The greatest concern relating JFH is its ability to maintain its past track record. It has one of the highest, if not the highest, ROA and ROE compared to its closest peers in the SG F&B sector (i.e. Soup restaurant, Sakae, Breadtalk). Not to mention its clean balance sheet with zero borrowing and its still positive FCF (4 year streak since 2012).
Now, the problem is that JFH's revenue has very likely plateaued. Growth in the top line has almost come to a halt since 2012, yet its selling and distribution expenses as % of sales kept rising (i.e. ~70% in 2015 vs ~60% in 2014). But they've managed keep their bottom line afloat, because their COGS as % of sales has been on a very consistent decline since 2009. Management attributed this to streamlining their in-house operations, building a factory in Singapore and making their own noodles instead of importing them from Japan. In the latest AGM board director Eugene promised they would never compromise quality for profit.
But this begs the question: So what if JFH hadn't been able to keep its COGS low all these years? Just how long and how much can JFH continue to lower its COGS? I doubt they can keep it up. This will ultimately hit their bottom line, if revenue doesn't expand, or if S&D expenses continue to rise. The outcome on the latter is quite obvious - I don't think rental or labour costs are going to fall anytime soon. At least not in land-scarce and labour-tight Singapore.
As for the former, I don't see how JFH can continue to expand and open more stores (even if they're new brands) without cannibalising their own sales elsewhere. I might be wrong. This is where it'll be interesting to see how things will pan out.
Otherwise, the time is probably ripe for ROA and ROE to start declining as net income falls. Even if their overseas JVs and sub-franchisee businesses take off I doubt that would have much significance for JFH because their contribution is so puny. After all, JFH earns only the raw materials and franchise license fees from their sub-franchisees, and about 25% of their associates profits (which amounted to about $546,000 in 2015). To put things in perspective, $546,000 is about 11% of net profit. Not too shabby, but this is not likely to make up for the decline from its main SG business.
I take cue from Pat Dorsey's Five Rules for Successful Stock Investing: "Restaurants in the slow-growth stage typically have strong FCFs, solid returns on capital, and usually start to pay out a dividend because they're running out of investment opportunities in the business. Few restaurants reach the slow-growth stage - most just go straight into decline. To be a successful slow-growth restaurant chain, the concept has to be ingrained in consumers. In the US, Macdonald's Wendy's, and Red Lobster have long passed the stage where their stores were destinations or chic places to visit. However, consumers know what to expect before they walk into the stores or cruise into the drive-thru. It's up to the restaurants to maintain that familiarity with consistent advertising and service. Failure to provide the quality of food or service that people expect can bring slow-growth firms into the realm of decline."
So JFH today fits into the slow-growth category. Whether it can continue to be a successful one depends a lot on its strategy going forward to gain customers loyalty. I'd rather they retain their old customers, than try something entirely new to attract new patrons but risk losing their old customers.
Now, the problem is that JFH's revenue has very likely plateaued. Growth in the top line has almost come to a halt since 2012, yet its selling and distribution expenses as % of sales kept rising (i.e. ~70% in 2015 vs ~60% in 2014). But they've managed keep their bottom line afloat, because their COGS as % of sales has been on a very consistent decline since 2009. Management attributed this to streamlining their in-house operations, building a factory in Singapore and making their own noodles instead of importing them from Japan. In the latest AGM board director Eugene promised they would never compromise quality for profit.
But this begs the question: So what if JFH hadn't been able to keep its COGS low all these years? Just how long and how much can JFH continue to lower its COGS? I doubt they can keep it up. This will ultimately hit their bottom line, if revenue doesn't expand, or if S&D expenses continue to rise. The outcome on the latter is quite obvious - I don't think rental or labour costs are going to fall anytime soon. At least not in land-scarce and labour-tight Singapore.
As for the former, I don't see how JFH can continue to expand and open more stores (even if they're new brands) without cannibalising their own sales elsewhere. I might be wrong. This is where it'll be interesting to see how things will pan out.
Otherwise, the time is probably ripe for ROA and ROE to start declining as net income falls. Even if their overseas JVs and sub-franchisee businesses take off I doubt that would have much significance for JFH because their contribution is so puny. After all, JFH earns only the raw materials and franchise license fees from their sub-franchisees, and about 25% of their associates profits (which amounted to about $546,000 in 2015). To put things in perspective, $546,000 is about 11% of net profit. Not too shabby, but this is not likely to make up for the decline from its main SG business.
I take cue from Pat Dorsey's Five Rules for Successful Stock Investing: "Restaurants in the slow-growth stage typically have strong FCFs, solid returns on capital, and usually start to pay out a dividend because they're running out of investment opportunities in the business. Few restaurants reach the slow-growth stage - most just go straight into decline. To be a successful slow-growth restaurant chain, the concept has to be ingrained in consumers. In the US, Macdonald's Wendy's, and Red Lobster have long passed the stage where their stores were destinations or chic places to visit. However, consumers know what to expect before they walk into the stores or cruise into the drive-thru. It's up to the restaurants to maintain that familiarity with consistent advertising and service. Failure to provide the quality of food or service that people expect can bring slow-growth firms into the realm of decline."
So JFH today fits into the slow-growth category. Whether it can continue to be a successful one depends a lot on its strategy going forward to gain customers loyalty. I'd rather they retain their old customers, than try something entirely new to attract new patrons but risk losing their old customers.