RE&S Holdings Limited

RE&S Holdings Limited ("RE&S" or the "Company") is offering 38m shares at $0.22 each, of which 35m shares will be through placement and the balance 3m shares through the public offering. The market cap based on the IPO price is around $78m.

The IPO application will close on 20 Nov 2017 at 12pm and commence trading on 22 Nov 2017. You can apply for the shares using the ATM or internet banking websites of DBS/POSB, OCBC and UOB. In addition, you can use the mobile banking app of DBS. 

Principal Business

RE&S was established in 1988 and is a concept owner and operator of F&B outlets in Singapore and Malaysia focusing on authentic Japanese cuisine and dining experience. 

It operates 34 restaurants in Singapore and another 5 in Malaysia. It also operates 38 quick service restaurants, food kiosks, Japanese bakery and food retail outlets locally.

Financial Highlights

The performance of the Company hasn't been consistent with profit fluctuating from $5.8m in FY2015 to $2.9m and back to $5.7m in FY 2017. It is hard to see how the Company can scale up significantly in the coming years unless they do some meaningul add-on acquisitions. 

Based on the post diluted EPS of 1.6 cents, the implied PE is 22/1.6 = 13.75x. My gut feel is that the profitability will continue to fluctuate in a range.

Dividend Policy

The Company intends to pay out at least 35% of its net profit attributable to shareholders for FY2018 and FY2019.

Assuming EPS remained the same as FY 2017 and on a fully diluted basis of 1.6 cents per share, the implied yield will be 35% x 1.6 cents divide by 22 cents x 100 = 2.54%. Not exactly attractive to me unless the Company can scale up its profits in FY2018.

Shareholders

Post the IPO, the founders Hiroshi Tatara and John will continue to own 83% of the Company with Heliconia holding 4.5% and the rest in public hands. The counter will continue to be tightly controlled. 

Use of Proceeds

The Company intends to use the proceeds for business expansion, refurbishment of existing outlets and general working capital

What I like about the Company

• Long operating track record - The Company started since 1988 and the management has survived the down cycles such as the dot com bust, SARS, Global Financial Crisis and even the Tsunami (radiation) crisis  
• Ability to develop different concepts - While it is solely focused on Japanese cuisine, it is able to develop 20 different concepts and brands to cater to differing demands and needs (example, requirements for high end and mass market needs are highly differentiated)

• In-house chefs and central kitchen - allows the firm to market test concepts and dining menu while ensuring economies of scale and consistency across the outlets through the central kitchen
• Rising income and regional expansion - There is a possibility for the Company to expand its expertise to neighboring countries and the rise of middle class in these countries will help boost the demand for better dining experience and RE&S will be well positioned to tap on this demand
• Reputable cornerstone investor - The cornerstone investor, Heliconia, also backed Jumbo and Kimly in their IPOs. While this bodes well for the IPO since they are investing at the same price as retail investor and provides added comfort that there is some institutional due diligence, don't bet on it that it will be there for the long term though and make sure you run before they exit.

Some of my concerns

• Single country risk  - While the restaurants are located in Singapore and Malaysia, any "perceived" food scare in Japan even if the materials may not "sourced" there, will result in the company being severely hit as it is heavily reliant on consumers who would like to enjoy the Japanese food and experience
• Our local consumers are fickle - The local consumers are fickle and demanding. Hence it is not easy to create a dining experience that will encourage customers to keep returning, especially with regards to the quality and price points 
• Competitive sector - This is a highly competitive sector as restaurants fight for a share of your pocket. Not all restaurants are doing well - such as Soup Restaurant, Sakae and Tung Lock. The high rental costs and lack of manpower mean that restaurants have to mange their operations well to have a survive the cut-throat competition
• Owners cashed out of company - Instead of paying off the debts, the owners cashed out out $12m in FY2017 prior to the listing and this is terrible concerning it is highly geared! See cash flow table below 🤕. Without the dividend payout, the Company would have a $5.2m positive cashflow though

• High leverage  - The Company is carrying on its books debt and indebtedness to the tune of $16.2m. This is about 45% of its shareholders' equity! 
• Auditor and Board composition - The auditor is a non big 4 and the board, with due respect, has an average age of 65.8 years old! The independent directors are all male, above 61 and don't have F&B experience. I would prefer to see some diversity and relevant experience or connections in leading the firm forward
• Small float and liquidity - Post listing, the trading will likely come down after the initial weeks. Investors will have to be wary of the small cap status and liquidity

Peer Valuation

My own view is that the food and beverage sector is "overvalued" with average PE trading at 30-32x. This is unsustainable.  While the PE of 13.7x for RE&S is a discount to its peers, it is not giving me any comfort. 

The closest peer is my view will be Japan Food Holdings that operates the Ajisan and other concept restaurants with a focus on Japanese food as well. It has the same market cap but RE&S has more superior EBITDA and PE multiple, howbeit lower yield.

Assuming it trades up to the value PE of Japan Food at 15 to 18x, the "fair value" of RE&S should be between Singapore 24 to 29 cents. 

My Ratings

I like two things - Heliconia and its relatively better valuation against its peers. I dislike the overall sector valuation, less than stellar board and the intense competition of this sector for the longer term and the fact that the company is highly geared with founders cashing out prior to the IPO. I will give it a 2 chilli for the initial debut but 1 chilli for the long term. It is a hit and run for me and make sure you run ahead of Heliconia. Heliconia is not subject to any moratorium and they don't have to report their sale to SGX as their shareholding is below 5%.

Polling Time

You can vote here.