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SI Research: Old Chang Kee – Curry Puffs Still A Delight For Investors?

What comes to mind when I mention curry puffs? If you thought of our very own homegrown brand Old Chang Kee (OCK), you are not alone. Though primarily known for its delicious curry puffs, OCK also carries many other brands under its wings, for example Dip n Go, Mushroom Cafe, and Curry Times. However, the main contributor to its revenue is still its signature puff products which account for 31.6 percent of its revenue.

Following the advice of the legendary value investor Warren Buffett, we should be investing in businesses that we can understand. Hence, many retail investors are likely to be interested in owning a share of the pie (or curry puff) in this local brand. In this issue, we dive straight into the books of OCK to examine if their financial reports are as satisfying as their delectable snacks.

To Invest, Or Not?

The first thing that many retail investors may look at is a company’s price-to-earnings (P/E) ratio. It is an important figure that investors use to evaluate how “expensive” or “cheap” a particular stock is. A quick glance at OCK’s trailing 12-month P/E ratio and one will be shocked to discover that it stands at a whopping 58.4 times. When we last compared Breadtalk to OCK in May 17, we saw that their P/E were rather similar at 21.2 times and 21.5 times respectively.

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The sudden spike in OCK’s P/E ratio is likely due to the depressed earnings per share (EPS) which fell from $0.04 to $0.01. Stripping off its one-off loss which will be elaborated below, net income will stand at $4.7 million. At this profit level, we observe that EPS have only fallen to $0.039. Consequently, taking the current share price of $0.84 as of 16 June 17, OCK’s P/E ratio remains the same at 21.5 times.

Comparing to Breadtalk’s current P/E of 22.5 times, OCK’s stocks may seem more attractive. However, P/E ratio is not all there is to evaluate the company hence we will follow up with a more in-depth assessment of its financial statements to ascertain if OCK is profitable in the long run.

Recent Financial Results

In its latest financial report for FY17, OCK showed a steep plunge in net profit by 64.9 percent to $1.7 million. That may have caught many investors off guard since OCK’s top line has been steadily increasing over the past years. Nonetheless, here at Shares Investment, we have explained that the sudden fall in profits is primarily due to a non-cash expense of $3 million relating to a revaluation deficit for the group’s Singapore and Malaysia factory building. We have thus mentioned that there is no need to be overly alarmed by the one-off loss.

However, even after stripping off the non-recurring loss, OCK’s net profit of $4.7 million will still be lower than FY16’s net profit of $5 million. More significantly, this will form a downwards trend in net income as it has fallen consecutively over the past three years.

Rising Operating Cost To Continue

The decline in net income is mainly due to the rising operating expenditure incurred by the group, particularly in selling and distribution expenses, as well as administrative expense. For example, in FY17 gross profit increased by about $3 million which is in line with revenue growth. However, operating expenses also rose by a total of $2.9 million, eroding away the gains in profit made by the group. OCK has attributed the increase in expenses to an increase in staff costs amidst a competitive labour market.

According to the Ministry of Manpower, the labour market will remain tight in the medium term with lower total workforce growth. Therefore it is likely that OCK will continue to face rising labour costs that will offset the group’s effort to improve its financial performance.

Another point to note is that revenue has been steadily increasing over the past three years mainly due to the opening of new stores, instead of growth achieved from existing stores. With the increase in operating expense, net income margin continues to fall and currently stands at 2.2 percent, adjusted to six percent stripping off the one-off loss.

Looking forward, we contend that OCK will have on to focus increasing revenue from existing stores, find ways to reduce operating cost and therefore increase its net income margin, to improve the overall performance of the group. Otherwise, investors are not likely to be attracted to its declining financial figures.

(Source: Shares Investment)
(Source: Shares Investment)

(Source: Shares Investment)

Financial Leverage

OCK’s debt-to-equity ratio has increased rather substantially in recent years. Currently standing at 38.5 percent, it is significantly higher than its past average of 15.8 percent since 2008. What is more worrying is its declining current and quick ratio (which monitors the group’s ability to meet its current liabilities due in a year’s time) over the recent three years.

From its balance sheet, we observe that current asset has been declining mainly due to decreasing deposits and cash & bank balances. The group has attributed the declining figures to purchase of property, plant and equipment (PPE), repayment of bank loans and finance lease, and dividends paid. Dividend payout ratio has spiked to a record high of 208.7 percent for FY17 as the group maintained its dividend of three cents per share despite the fall in net income.

Current liabilities continue to rise partly due to higher period-end billings by trade suppliers and contractors, and the group has to finance more bank loans due to the cost incurred for construction and renovation of the Singapore factory.

If current ratio continues to fall below one, it will be a warning sign that the group is unable to finance its current liabilities due. Hence it might be advisable for OCK to slow down its pace of expansion and spend less on PPE, or even decrease their dividends paid out to have a healthier balance sheet.

table 2
table 2

Future Prospects

At the start of this month, news broke that OCK will be setting up its first outlet in central London in the second half of this year. Their delicious curry puffs seem to be loved by people everywhere as the response to a pop-up store held in Kentish Town in north-west London was met with a tremendous response. The puffs were sold out within four hours at the two-day event. There appear plans for further expansion in other places such as Manchester and Birmingham as OCK attempts to establish itself in the UK. However, the success of this overseas venture is still up in the air with many uncertainties. At this point, we are unable to ascertain if it will be able to improve OCK’s net income in the future.

Considering the analysis done on its financial health and taking a conservative stance, one can expect OCK’s net income to continue falling. Consequently, income to be distributed as dividends will likely decrease in the future when it becomes increasingly untenable to remain at its current level. Share price will likely adjust downwards in the long run as the market cools down and value the business more objectively.

Given OCK’s popularity amongst Singaporeans, we believe that it will continue to provide us with delicious snacks on our cheat days. However, much like how we should stay away from deep-fried food for health’s sake, OCK might want to cut down on excessive expenses and improve on its net income margins to ensure its sustainability. Patience is a virtue that investors should possess while waiting for a reversal in OCK’s financial figures.

Curry Puff
Curry Puff