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Singapore Kitchen Equipment Ltd - Strong sales offset by lower margins and one-off expenses

Written By Stock Fanatic on Wednesday, September 18, 2013 | 18.9.13


Key positives in 1H13
1. SKE's Revenue increased by 42.5% yoy to S$7.8m in 1H13. This was driven by a 76.5% increase in equipment sales following the expansion of its sales team from 6 to 9 employees. We see this slightly above our FY13 forecast as SKE experiences seasonal sales. First half revenues usually contribute about 33% of full year sales.

2. Gross profit increased by 5.8% yoy to S$2.5m in 1H13. This was driven by an increase in sales revenue rather than improvement in gross profit margins.

3. An interim dividend of 0.25 Scts has been declared for 1H13.

Key Negatives:
1. Gross margins declined 12 % pts to 32% in 1H13 due to the absence of a bulk purchase discount that it enjoyed from its principal suppliers last year. Nonetheless, gross margin of 32% is within the company’s normalized margin range.

2. Administrative expenses increased by 52.8% yoy (+S$0.6m) to S$1.7m. About 52% of this increase of S$0.6m is due to the pre- IPO expense (S$0.08m) and director’s fees (S$0.2m). Going into 2H13, only the increase in headcount expense of S$0.2m will be recurring.

However, we expect IPO expenses of S$0.78m to be recognised in 2H13 and the balance of S$0.47m to be recognised in 1H14.

3. Net profit declined by 72% in 1H13, weighed down by the one off pre-IPO expense and director’s fee highlighted above.

Geographical outlook:
Management plans to engage in JVs to move into new markets such as Myanmar and Cambodia by 2014. Meanwhile, SKE will continue to derive about 90% of its revenue from Singapore.

Business outlook:
Management has guided it will purchase a laser cutting machine for its fabrication plant by 1Q14. We believe this will help reduce material wastage and improve gross profit margin by around 2-5%.

SKE has launch a “Value Plus” brand to target the low end market of hawker and food court vendors. We believe this will help broaden its customer base without compromising the SKE brand.

SKE is looking to capitalise on the recent trend of bigger F&B players moving into central kitchen. SKE enjoys higher profit margins from the sale of its proprietary fabricated kitchen equipment (60% of revenue) and provision of servicing/maintenance for such equipment.

SKE has plans to launch a new business segment selling refurbished kitchen equipment to smaller F&B players. We believe this segment will enjoy relatively good margins as used kitchen equipment can be obtained and refurbished locally at low cost. Unchanged at Hold

We maintain our hold recommendation with a new target price of S$0.146. (using closest peer Fujimak Corporation’s historical average forward P/E of 10.1x on our CY14 EPS of 1.45 Scts) (Read Report)

Source : CIMB Research


Posted on Wednesday, September 18, 2013 | 18.9.13
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