Singapore-grown Old Chang Kee's (OCK) signature Curry Puff is a well-known brand. Its snack kiosks and cafes sells a range of deep-fried snacks. Its kiosks are mostly situated at high foot traffic areas, such as MRT stations, bus interchanges, petrol stations, shopping malls and tertiary institutions. The cafes are usually squeezed into the shared spaces with the kiosks, which optimises its staff.
Two central kitchens support this business chain. Snacks are all frozen and delivered to the kiosks to be deep-fried before being sold. Perishables are limited to the unsold snacks at the end of day. There is less wastage and staff costs are comparably lower than a restaurant. No chefs are required to deep fry too. A timer and a staff who knows how to use the timer is sufficient.
Net Profit Margin
Based on the 9M2017 financial report, profit margin was 6.5%. Its margin had been steadily dropping by 0.5% each year. This is a lean number. It's very unlikely this margin can increase, unless the business model changes e.g. automated vending machines that rely less on retail staff, selling processed food to other food suppliers. Rising rental, retail staff and transport costs will translate to price increases to avoid eating into margins. Overseas travel expenses was cited as having increased, hence it bears further thought as to whether OCK will be considering overseas expansion or considering to bring in overseas franchises.
Threats to Profitability
Competition to OCK may be in the form of another chain that sells breakfast or snacks but at a lower cost, deemed more value for money or for taste/health reasons. Hence, even if OCK has a high market share in the fried snacks segment, this may not translate to higher profit margins as consumers have a variety of choices. Furthermore, while OCK has come up with new menu items e.g. Cheese Chicken Bites, Cheesy Curry Puff and Apple Puff, there is no stopping other operators from mimicking or even improvising on the food items.
Free Cash Flow (FCF)
OCK's FCF has been negative for the past three years. This can be interpreted as OCK over-paying dividends. A more sustainable dividend amount would have been 1.5 cents, which will mean FCF is 0. Overall cash generation isn't sufficient to fund its capital investments in its central kitchen.
Valuation
Last closed price $0.85. Yield is 3.5% based on a 3 cent dividend payout. However, this yield will be halved if we take a more conservative projected dividend of 1.5 cents. Price appreciation potential will depend on signs of increase in cash generation ability or profit margin. At the moment, there are no such signs, which suggests that, OCK is probably fully valued at the current price. We value OCK at $0.85.
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