What a week! As predicted the market has turned around in last week of June. Of course people are going to credit it to the resolution of the Greek debt crisis. Which I think is utter trash but who am I to say? Please raise your hand and let me know which of you actually thought that Greece was going to default. The German and French banks have come out to offer extension of the maturities of their Greek debt holdings. So we have averted the bullet for now. Christine Lagarde's appointment also brought lots of confidence into Europe. We will see more stability for now.
What we had here was a very smooth week, bringing back the bullishness with a bang. You know what this week illustrated? It showed that it is very difficult to time the market and if you missed this week, you would have missed a great run. The key question is whether the bull is back. Let me say this, I think there will be a little of a dip and after which the market will rebound. We have just witnessed the best weekly performance in US markets in 2 years. The S&P500 rose 5.6% over the week which meant the market recovered all its losses for June! What a way to start July.
Enough of the market, don't want to start sounding like a cheer leader for it. This week I had dinner with a friend whom I have tremendous respect for. He is able to make the junk stocks in the world look like blue chips. How? Just by buying them. He is the luckiest man I have ever met and trust me, many of my friends have witnessed his magic. Right after he buys, the stocks tend to do very well registering very good gains within a short period of time. Also this is the guy who owns a huge chunk of Fragrance Holdings, so you now know how well to do he is. Why did I mention him? Its because he asked me to look at Soup Restaurant. I could not bring myself to say no, especially with his track record. When I asked him why he was interested in it, he gave me an answer which I could not argue with. " I like the food.", he said.....How do you argue with that?
So here it is. Soup Restaurant was incorporated on 20 July 1991 and they operate a chain of restaurant outlets under the name of "Soup Restaurant" and "Dian Xiao Er" in Singapore.
Soup restaurant's stock price is definitely not going to perform like Chipotle Mexican Grill (stock has just shot through the roof since its listing) in the US. It is however one of the more consistent performing stocks in terms of financial performance. Generating positive cashflows from operations every year and have a very healthy balance sheet. Earnings have grown consistently with RETURN on Equity of more than 20% per year on average since 2006. That is pretty impressive. The company is currently trading at 11 times historical p/e which is not excessive. However if we take out the cash holdings of the company, the p/e falls to 8.6 times. In terms of valuation, I do think it is cheap.
There are however some fears on my part with regards to costs going forward for the company. Raw material costs is the primary worry as food prices continue to soar and question is whether the company will be able to transfer the higher food prices to the final consumer. Labour costs will also be tough to handle because the labour situation the the services sector is extremely tight, throw in the tighter immigration laws preventing more foreign workers to come into Singapore, you can expect labour costs to tighten as competition for such workers pushes wages higher. Rental is also a big issue. I was recently looking at some retail spaces in prime areas and on a per square foot basis sellers were looking for $5000 and above. Rental rates have reached levels which makes many retail businesses no longer viable. Tampines Mall alone is renting at $68 dollars per square foot. So imagine how much would a restaurant have to pay for a space big enough for their operations.
We will have to monitor the situation closely for retail related counters going forward. I have to admit, we do have some really good retail franchises in Singapore which do look promising but they will have to expand outside of Singapore to grow and diversify their exposures because if they rest on their laurels and stay here their growth prospects will diminish. Breadtalk, Eu Yan Sang, Old Changkee are just a few of the franchises that have pretty good prospects but more needs to be done to secure their growth going forward.
So in conclusion, I do like Soup Restaurant for its consistency and valuations but the headwinds are ahead and bear in mind this is a very competitive industry and the barriers of entry are not strong, thus it is not a stock which I will like to buy myself. My view is that the stock will not have much upside from here so it is not something I will buy. But I know I am going up against one of the luckiest guys around and the odds may be against me. All one can do is to use the facts and figures and stick to his investment philosophy to determine whether a stock is worth investing in or not. I will not buy this stock, but I will still continue to eather there. Hahaha.
Have a great week ahead!
Best,
SVI
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Good post here.
ReplyDeleteI would think that if indeed inflation, all industries will get affected. The only difference is who gets it worse for inflation and who can pass the costs on better.
I was having a hard time trying to understand how Soup maintained such growth and margins though the years. But it does seem its coming from a low base.