F&B players pivot to suit local flavour but still hungry for foreign consumers

The way Paul Chew, head of research at Phillip Securities Research, sees it, the worst may be over. However, restaurants will take some time to return to pre-pandemic levels as social distancing measures are still in place, implying that the seating capacity is cut by around 20% to 30%.

With restaurants not being able to operate at full capacity and accommodate hungry consumers, Chew notes that trends such as online delivery channels are essential for F&B operators. This is especially key when Covid-19 cases rise and the government bans dining-in.

Echoing this sentiment, Jarick Seet, RHB Group Singapore’s head of small-mid caps, tells The Edge Singapore: “With Singapore adopting an endemic approach for Covid-19, it seems the worst may be over provided that future new variants are manageable.”

“The F&B industry has gone through a difficult period in the past year and deliveries have surged over the period. Restaurants with branding and a good following for their food have also fared much better than those without. Essential food providers with lower selling prices like Kimly have also fared better compared to players like Jumbo and No Signboard,” says Seet.

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Closer to home

The impact on tourism was largely felt by some of the big F&B retail players in Singapore, especially the likes of Jumbo Group and No Signboard, as these brands, with their signature crab dishes, typically cater to tourists and big groups.

While these F&B brands are popular in Singapore and loved by locals, dining-in numbers have fallen, with social distancing measures in place and consumers opting for takeaway meals from nearby eateries instead.

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Furthermore, the way Neo Kah Kiat, CEO of the recently delisted Neo Group, sees it, restaurant food is too rich for everyday consumption. Local consumers want simple and affordable fare for their daily meals, and meals at restaurants are reserved for the weekends or a special occasion.

Before Neo Group delisted in April this year, its 1HFY2021 ended September 2020 saw earnings surge 486.5% to $13.6 million, while revenue declined by 3.3% y-o-y to $88.1 million. Despite its event catering revenue taking a hit, the company’s home catering and manufacturing business enjoyed growth.

Neo Group on March 30 announced that it will be privatising. Neo and his wife Liew Oi Peng, who already held 82.26% of the shares, bought out the remaining shares with an offer of 60 cents per share, representing a 20% premium over its last traded price of 50 cents on March 29. This move followed several share buyback events by Neo since 2H2020. Before the privatisation, Neo held 76.69% of the company. After the privatisation, he holds 90%, while Liew holds 10%.

Furthermore, with work-from-home arrangements solidifying as today’s work norms, heartland eateries are thriving. With consumers favouring simple and affordable food options and their heavy presence in the heartlands of Singapore, analysts like coffee shop operator Kimly and food court operator Koufu.

Koufu in its latest 1HFY2021 ended September results recorded close to fourfold growth in its earnings to $10.1 million from $2.2 million a year ago, as revenue improved by 18.8% y-o-y to $105.7 million. The revenue increase was mainly thanks to improvement from an across-the-board growth in business as well as contribution from newly acquired entities.

With Koufu’s stellar results, Maybank Kim Eng has initiated a “buy” call on the company with a target price of 78 cents. Analyst Eric Ong sees Koufu as one of the key beneficiaries of Singapore’s reopening and is positive on its robust balance sheet with net cash of $68.8 million.

Furthermore, Koufu has been reinforcing its presence in Singapore with organic growth. It recently opened a new food court in Outram Community Centre, and it secured leases for a Dough Culture kiosk at Jurong East MRT Station and a Grove QSR at Northshore Plaza in 4Q2021. It aims to set up about 20 outlets by FY2023 to further expand the Grove brand.

“We expect these new stores to contribute positively to its organic growth when they open,” says Ong, who also believes that Koufu’s new integrated facility will enhance operating efficiency once it commences operations.

“Kimly’s coffee shops are mostly in the heartland areas, which strongly benefit the group as people are stuck at home during lockdown. However, this also suggests Koufu gets to ride the recovery wave as Singapore forges ahead with its reopening plans,” he adds.

However, Koufu on Nov 24 announced a business update stating that its total revenue on a same store basis excluding new outlets decreased by 20% for the period July 1, 2021 to Oct 30, 2021, as compared to the same period in 2019 (pre-pandemic levels). The company said it expects further impairment losses on trade receivables, property, plant and equipment as well as right-of-use-assets on non-performing outlets to be recognised in 2HFY2021.

UOB Kay Hian too has kept its “buy” recommendation on Koufu with a target price of 77 cents. “Koufu is confident that it will emerge stronger post-pandemic given its good expansion strategy of securing good locations at favourable rentals, while most of its competitors are scaling down their operations,” says analyst John Cheong, while noting that Koufu’s net cash of $68.8 million, which represents about 20% of the group’s market capitalisation, could help it seize new opportunities.

Pang Lim, Koufu’s executive chairman and CEO, says: “To navigate the current situation, the group continues to have a strong balance sheet and we expect to remain competitive with our prudent expansion plans. Where opportunities arise, the group will look to capitalise on these opportunities with our strong and growing net cash position.”

As at Dec 14, shares in Koufu have dropped 2.9% YTD to 67 cents, giving it a market capitalisation of $374.7 million.

It seems that the knack for manoeuvring around the F&B industry runs in the family, as Pang Lim’s brother Pang Pok, has also ventured into the food business. Pang Pok is the executive director and CEO of GS Holdings, which started out as a centralised commercial dishware washing company, but later ventured into the F&B space in December 2018 with the acquisition of Hao Kou Wei, a company in the business of letting and operating food courts, coffee shops and eating houses. In May 2019, via this subsidiary, GS Holdings acquired local chicken rice chain Sing Swee Kee.

GS Holdings was not able to run its dishwashing business profitably, which it exited in January 2020 and reoriented itself to F&B. Most recently, it entered into a joint venture agreement with local food manufacturer Focaccia Foods to develop, franchise and manage various F&B brands, among others.

For a start, the joint venture partners are planning a new F&B concept that will be developed into a franchise model, targeted to be set up in coffeeshops and food courts across the heartlands of Singapore.

On the other hand, Kimly’s latest FY2021 ended September recorded earnings growth of 55.7% y-o-y at $39.3 million, with a 13.2% increase in revenue to $238.6 million. This was thanks to higher contributions from new and existing food stalls, as well as growth in food delivery sales.

“On the operational front, with growing demand from the food delivery business, we will continue to reinvent, innovate, and upgrade our menu offerings to attract and retain online customers. Through the integration of new technologies for the upgrade of our central kitchen, we are confident in improving productivity and reducing the reliance on manpower. We will continue to strengthen our income base by enhancing our food offerings and operational efficiency for greater customer and shareholder value,” says the directors of Kimly in its results release.

While Kimly recorded stellar results for FY2021, on Nov 11, the group’s chairman Lim Hee Liat and its executive director Chia Cher Khiang have each been charged by the Commercial Affairs Department (CAD) for an offence related to Kimly’s failure to notify the Singapore Exchange (SGX) that its acquisition of Asian Story Corp (ASC) was an interested person transaction. The acquisition of ASC has since been rescinded.

Following the CAD charge, Lim and Chia both resigned as directors but remain employees of the group. And despite the negative news, analysts remain positive on the stock, with RHB Group Research and DBS Group Research having “buy” calls on the stock. “We still like Kimly as their acquisition of Tenderfresh provides a new area of growth for the company,” says RHB’s Seet, who believes that the charges against Lim and Chia will not majorly impact the company’s operations.

“We believe that more certainty of this ordeal will be positive for Kimly in the long term as it finally removes the overhang of this case and allows management to reshuffle and move forward with its strategic plans. We think Lim, who is the majority shareholder of the company, will likely continue to benefit the group with his expertise and experience,” he adds.

DBS Group Research analyst Paul Yong sees the stock as “undemanding” as it is trading 12 times FY2021 PE, about 0.5 standard deviation below its five-year mean of 15 times.

Yong too is upbeat on Kimly’s Tenderfresh acquisition. “Leveraging Tenderfresh’s position in the Halal market, Kimly will be able to reach out to the 14% Muslim population in Singapore. Synergies expected from the acquisition include cross-selling and streamlining of processes. We project a 22% revenue CAGR in FY2020-2023F for the food retail segment,” he says.

While Yong remains conservative on the group’s food outlet expansion, the analyst understands that there is a limited supply of long-term leasehold coffee shop properties for sale or lease, which could add further upside to his estimates if Kimly can deliver more acquisitions by using its strong balance sheet to fund inorganic growth.

Manufacturing a win

As the heartland eateries gain a star in investors’ portfolios, F&B manufacturers too have seen a jump in both results and share prices, as consumers stock up their pantries amid work-from-home measures and preference to stay at home.

Thanks to this trend, local Chinese sausage and canned meat manufacturer OTS Holdings decided to list on SGX. In June this year, OTS listed on the Catalist Board with its IPO priced at 23 cents.

As at Dec 14, shares in OTS have declined some 10.3% to trade at 26 cents.

In its latest FY2021 ended June results, earnings were 15.8% lower y-o-y at $3.0 million due to IPO expenses. Earnings excluding IPO expenses were 13.9% higher y-o-y at $4.0 million. Revenue for the period was 11.5% higher at $38.5 million.

SAC Capital on Sept 2 initiated coverage on OTS with a “buy” and a target price of 40 cents. In her Sept 2 report, analyst Peggy Mak notices some drag in FY2021 due to the Covid-19 pandemic. Stockpiling activities throughout calendar year 2020 have resulted in the front loading of orders booked in OTS’s 2HFY2020 and 1HFY2021. There is also a shortage of labour which means production is not at full swing.

To this end, OTS is accelerating automation to cut labour content amid higher costs to retain workers, while restrictions on dinein lowered demand from food service operators and supply chain bottleneck held back the marketing push into the overseas markets, says Mak.

Other notable food manufacturing players that analysts have their eyes on include Food Empire and Thai Beverage (ThaiBev).

For RHB’s Seet, Food Empire is among the research house’s top small-mid cap picks. Seet deems the current rising materials and distribution costs as “temporary” and expects costs to taper down in FY2022 ending December 2022. Food Empire has also increased its prices to mitigate the cost hike, which should sustain margins in 4QFY2021.

That said, Seet believes that FY2022’s results will better reflect Food Empire’s potential with expectations of a strong rebound in earnings.

ThaiBev, on the other hand, saw earnings for the FY2021 ended September period increase by 8% y-o-y to THB24.6 billion ($1 billion), while overall revenue declined by 5% y-o-y to THB240.5 billion due to continue impact from the pandemic.

Phillip’s Chew recommends “accumulate” as the post-lockdown recovery is underway, albeit at a tepid pace in the near term, as the lockdown takes a toll on consumer sentiment and income. He sees the impact of borders and nightlife entertainment reopening to only have more material effect in 2HFY2022.

DBS Group Research is also upbeat with its “buy” call on the stock. analysts Woon Bing Yong and Paul Yong like the stock for its strong market share in Thailand and Vietnam and its attractive valuation.

New flavours new trends

While the worst may be over restaurateurs and a better outlook ahead is expected for the manufacturers, a new trend has surfaced within the F&B industry. It seems that with sustainability issues under the spotlight, the alternative protein space is growing and is gaining a lot of investment.

Already, local players such as Yeo Hiap Seng (Yeo’s) has hopped on the health and wellness bandwagon. Yeo’s has partnered Swedish oat milk company Oatly to be the latter’s first supply partner outside of Europe and will be producing Oatly drink products in Yeo’s local manufacturing facility at Senoko Way. This will be the first time Oatly products will be produced outside Europe and North America. Additionally, Oatly will be investing, alongside Yeo’s, some $30 million in the manufacturing equipment and facility.

Recently listed OTS Holdings too is about to introduce its new plant-based luncheon meat products. Expected to launch in April 2022, a portion of the group’s IPO proceeds were allocated for the R&D and launch of this new product.

Thanks to the pandemic, the spotlight on sustainable and safe food is brighter than ever. Singapore’s government is placing a heavy focus on this segment and putting in large investments into several alternative protein companies and introducing programmes to support the companies in this particular segment.

In the recent inauguration of Shiok Meats’ Mini Plant, Minister for Sustainability and the Environment Grace Fu mentioned that the nation’s “30 by 30” goal seeks to help the country produce food in a sustainable, climate-resilient and resource-efficient way.

“Singapore as a living lab can develop solutions that will serve not just ourselves but the region and the world,” she says, adding that Singapore is building its capability and capacity to produce 30% of the country’s nutritional needs locally and sustainably by 2030.

“We are beginning to see rapid development of alternative protein products, fuelled by increasing consumer preference for sustainable food products,” says Foo.

“The challenges to food safety that we face today will continue to evolve. The future of food will require us to cultivate an integrated ecosystem that pairs innovation with food safety, one which is backed by a forward-looking regulatory environment based on science,” she adds.

With that, it is no surprise that Singapore sovereign fund Temasek Holdings has seen to be rather busy in the alternative protein and sustainable food space.

In November, Temasek launched the Asia Sustainable Foods Platform to focus on addressing the challenges of scaling up the production of alternative proteins, as well as accelerating the growth of sustainable foods in Asia. The platform aims to provide solutions and support, as an enabler, operator and investor, to food-tech companies as they go through their life cycle from product development to commercial scale-up.

“Asia is expected to require around US$1.55 trillion [$2.13 trillion] of investment over the next decade to satisfy growing consumer demands for healthier and more sustainable food options. We need to evolve our current capabilities to bolster food security and strengthen supply chains,” says Yeoh Keat Chuan, deputy head, enterprise development group at Temasek.

“Temasek has invested over US$8 billion in the global farm-to-fork value chain since 2013, and will continue to increase our investments in this space. Singapore has a significant role to play in the transformation of the agrifood sector. The Asia Sustainable Foods Platform aims to support local and regional businesses, innovate, scale up and commercialise,” he added.

Some of Temasek’s investments within this segment include US-based Impossible Foods and Eat Just; Australia-based v2food; as well as several local start-ups such as Next Gen Foods, Float Foods, Growthwell and more.

Rohit Bhattacharya, director of enterprise development at Temasek, mentions in a Temasek Review 2020 article titled “Leaving the Sea Out of Seafood: Beefing Up Asia’s Food Supply”: “Asia will be home to more than half of the world’s middle-class population by the end of this decade, and there is a strong positive relationship between income levels and demand for animal protein.

“But the way animal protein is produced today is very resource-intensive,” he adds. “The world needs to innovate and become more efficient at food production if we want this planet to continue sustaining our children and their children.”

What’s next?

With new trends coming up and the world starting to move towards an endemic, the F&B players can only go up from here.

With that in mind, peer-to-peer lending platform BRDGE Technology, licensed under the Monetary Authority of Singapore, launched a dedicated F&B financing package to support the local F&B SMEs. BRDGE offers funding support for SMEs that are non-bankable or unable to secure a loan from traditional financial institutions. The F&B loans are packaged with interest rates from less than 1% per month for between three to six months, with a lowered credit assessment criteria matched to changing dining-in rules in the past three to six months.

“As the pandemic continues, more and more businesses are facing problems maintaining cash flow. We’re also seeing a fundamental shift in the reasons for getting loans. Where previously companies were discussing funding to help them grow or expand, today we are speaking to business owners who are concerned about surviving to the next month. The government and consumers are surely doing their part to help businesses survive, but every little bit helps and this relook at how we assess loans is one part of our commitment to the Singapore business community,” says Kevin Wong, CEO of BRDGE.

“The dining-in group sizes have been adjusted more than 10 times since April 2020 and have affected the F&B industry. The latest launch of our financing package is specifically curated to help the F&B players in direct response to the current pandemic-driven uncertainty around dining-in,” he adds.

In the meantime, the industry is looking to 2022 for better days. “We expect a rebound in revenue [for the F&B players]. Despite the prevalence of online delivery, it cannot replicate the dining experience at a full-service restaurant,” says Phillip’s Chew.

Delivery partner FoodPanda believes that the F&B industry is poised to grow moving forward. “We expect the food delivery and F&B industry to continue growing post-pandemic, resulting in a more hybrid consumer behaviour pattern where a large portion of people’s spending habits will still remain online… With the rise of new digital experiences, we foresee that personalisation of customer touchpoints with food will be the next big evolution which we are already working on,” says FoodPanda CEO Jakob Angele.

On Nov 22, the Singapore government relaxed social distancing measures, allowing a maximum of five people to dine in and this is expected to have a positive effect on the F&B players as they can better utilise their restaurant space.

RHB’s Seet, too, expects next year will likely be better for the F&B players, but remains cautious on potential new virus variants. “We think that the F&B industry will be poised for a rebound in FY2022, provided that the Covid-19 measures are relaxed and that there are no new variants that are much worse than the current ones,” says Seet.

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