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FJH appears to be facing pretty tough headwinds. I was first looking at it because of the food court business and supposedly high returns on capital.
In the short term: For the last 5 quarters, since June 2009, their net margins have shrunk from 10% to 3%. TTM profits are down 25%, largely driven by an increase in operating lease expenses (new restaurants & rent hikes) that are not bringing in revenue.
In the mid term: Since 2005, profits have fallen 2/3, in part driven by increases in personnel costs and in the near term by operating leases.
For their 2 segments:
Food Courts: Return on Capital looks good but dropping because of falling margins - which is difficult to understand when they should be passing on the costs to their tenants. If we look at their operating leases: they rent their premises from their landlords for about 2-5 years, and then out to the food stalls for 1-2 years, so in an environment of generally rising rents, they should be renewing their leases at better terms.
The one option is growth outside Singapore, and they seem to have some reasonable success in Msia, although a strong backer like Lippo can be very helpful in getting prime sites and understanding the local culture.
Restaurants: this is the typical business with low barriers to entry, unlike food courts which needs substantial outlay. There should be no reason to pony up for intangible assets unless it's something like McDonald's or KFC. Margins are razor thin: for FY 2009 & 2008, we have 1-2%, and although it's not broken down in the last 3 quarters, we don't find any improvement accruing to the income statement even when times are better and people should be spending more on food.
There is minimal value in replacement costs to the food courts, as unlike some corner coffeeshop/kopitiam, FJH doesn't own them. What they carry on their balance sheet is the food equipment and the capitalized renovation costs (which are worth 0 if they have to abandon their lease). Yes Auric Pacific / Lippo paid abut $0.55 in Sep 08, but the latest FY 07 had 2x the current profit as now, even so Auric Pacific has not been doing too well with Delifrance, dotcoms, communications businesses etc.
Management should sell the restaurants and concentrate on their food courts, where barriers to entry in terms of financial capacity and management are higher. If they can grow this business anywhere (like outside Singapore together with Lippo), well and good, otherwise they should just return the capital to shareholders.
The odds are high that management won't / can't reverse all these, so it's probably worth somewhere around net tangible assets.
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Went to FJ's food court at nex yest at 3pm n it was not as crowded as food republic's better located one. Ordered from their toast@work n their half boiled eggs are not consistently cooked, ..one too raw and another slightly overcooked. Disappointing...
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how much is the underlying business that keeps underperforming worth? not much assets really not much intangible brand as well.
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sometimes i wonder if comparing food courts business between food republic and food junction is akin to comparing SMRT with SBS.
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i picked up some lots, half of them at $0.20 and the other half at $0.205 this week.
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