Harry's Holdings

[Musicwhiz]

Somehow, I still can't quite convince myself of the attractiveness of such an industry, much less as an investment option, despite seeing all this interest here. 7 pages worth of comments!

Haha it's OK I think - these threads are just meant to discuss the companies and their businesses + financials. Ultimately, it's up to the individual to form his/her own opinions on whether a company is attractive enough for investment. Objective views are welcome in all threads though I must caution that it's impossible to have 100% objective views, especially if one is either interested in a Company or is already vested. I am speaking from experience....

(Not Vested)

[RBM]

Harry's reported out its First Half 2011 Financials on Friday evening ......

They made a total loss of S$ 425,000 (vs. a profit of S$ 67,000 in 1H2010). The cost numbers make for a depressing read, viz.: first-half-year-on-first-half-year the following is apparent...........

- Rental Costs up 22%
- Staff Costs up 20%
- Cleaning Expenses up 29%
- Utilities Costs up 22%
- Other Costs (including management fee) up 18%
- Depreciation was up a whopping 34%???

IPO related costs were S$ 62,000 higher than in the same period last year. Overall, first half costs were up S$ 3.6 Million, from S$ 19.5 Million to S$ 23.1 Million. I could not decipher how much of this was due to opening of any additional outlets (probably due to my inability to break these kind of things down - my apologies). It looks like the restaurants, catering and hospitality units all did poorly. Bar revenues were up ~ 9% but this can never cover the above double-digit % cost increases.

Section 10 of the results report includes the following narrative: QUOTE With increasing keen competition, inflationary pressure in food prices and expected increase in labour costs, the Group foresees an increase in the cost of operations. Nonetheless, the management is cautiously optimistic that the Group would be operationally profitable (not taking into account the IPO expenses incurred in FY2011). UNQUOTE. Looks like this does not bode well for second half financials.

Harry's margins were razor-thin beforehand - and the business simply can not bear the type of double-digit % cost increases they have just reported out. I would suggest there are now serious question-marks about the long term sustainability of the business, in its current form.

Bearing in mind some previous posts on this thread........
- I would still wager that Harry's share price descends into the single digit cents range....... and I don't believe there will be hordes of Matsalleh's taking a serious look at buying the Company when it does (just my personal opinion dydx!),
- The share price will resolutely stay that way until CEO Mohan both sharpens the focus of Harry's business AND brings costs to heel.

Sorry to sound like a worn record. Remaining unvested but on the sidelines. I believe it will be worth watching how Harry's share price unfolds this coming week.

[dydx]

Of course, it pays to scrutinize the numbers in sufficient detail when reviewing Harry's 1H (ended 30Jun11)-FY11 results.....
http://info.sgx.com/webcoranncatth.nsf/V...A003E65E4/$file/Harry_Results_Announcement_1H2011.pdf?openelement

Indeed, in 1H-FY11, Harry's had a pretax accounting loss of $385k on a higher revenue of $22.7m (+16.1% yoy; and +1.8% vs. 2H-FY10). A relevant question: Is the small loss significant enough to be a real concern? IMHO, no.

If we add back the IPO expenses of $425k, Harry's would have a small PBT of $40k. If we also add back the depreciation of property/equipment of $1.733m, and property/equipment written-off of $6k, in 1H-FY11, Harry's group operations actually generated a positive pretax FCF of $1.779m, which is equivalent to 7.8% of revenue - i.e. Harry's group business delivered net cash at the rate of $0.078 to a $1.00 in revenue. A relevant question: Is this rate of FCF generation good enough? My wish is to see 12%.

In 1H-FY11, Harry's incurred lesser capex of $1.114m (vs. $5.55m in 1H-FY10) - mainly for a new outlet at Mapletree Business City and a indoor/outdoor bar @T1 Changi Airport - which was sufficiently met by the FCF of $1.779m generated.

In analyzing the small pretax loss, we should also bear in mind that Harry's opened a total of 7 new outlets in FY10. Full details of the 7 new outlets can be found in p6 of Harry's Jul11 Presentation Slides.....
http://www.harrys.com.sg/Downloads/Harry...072011.pdf
As most of the new outlets and "The Club" boutique hotel were opened in mid- and 2H-FY10, we can reasonably assume that the usual related start-up losses - mainly caused by the mismatch between revenue and operating expenses in the first 6 months - would stretch into 1H-FY11. In fact, this point has been clearly mentioned in Note 8 (a)(iii) under the heading "Cost and expenses" in p10 of the 1H-FY11 results announcement.

Harry's latest B/S as at 30Jun11 remains strong and liquid. As a cash-based business and with low debts, Harry's has an acceptable financial profile.

Based on the 1H-FY11's revenue of $22.7m, Harry's is now a business with a yearly revenue in excess of $45.0m, generating a yearly pretax FCF in excess of $3.5m - hopefully, this will improve with time! Based on Harry's latest 95.0m outstanding issued shares, and the last done share price of $0.125, Harry's now has a market cap. of only approx. $11.9m. IMHO, this is simply totally out of proportion!

[RBM]

Your pushback is appreciated dydx - but respectfully, we are just going to have to agree to disagree on the prospects for this one!

I bow to your far superior accounting skills dydx. And this obliges me to keep it simple.......

Incomes for 1H 2011 indeed total just over S$ 22.7 Million. Excluding IPO expenses, 1H 2011 costs (i.e. excluding taxes and depreciation) totalled just under S$ 21.4 Million. i.e. cash margins are already very thin. And management is now signalling further cost increases for various reasons. I accept that there is a "phasing mismatch issue" to the extent that bar start-up costs take time to yield (full) results - but Harry's Board made little attempt to report a quantification of the costs for start-ups.

I see far too little management prioritisation on Harry's cost bases and a ridicolous pursuit of diversification, disenabling a management focus on the overiding key business, i.e. the bars.

I agree with you regarding revenue generation. Harry's revenue is not far short of S$ 4 Million per month. That should be appealing. But my strong concern would be that this revenue generation is not being effectively exploited and the mismanagement of "cash-outs" and a lack of a honed strategic focus is in effect destroying this.

Lets see how Mr. Market reacts in the coming weeks and months. Thats what really matters. With the share price currently at S$ 0.125, my personal view is that the share price will hit S$ 0.08 before it hits S$ 0.17.

Again, my thanks to you dydx.

[dydx]

On 26Sep11 (yesterday), CEO Mohan Mulani resumed buying shares from the open-market and added 102 lots (out of a total 103 lots transacted) and paid an average $0.10784/share.....
http://info.sgx.com/webcorannc.nsf/Annou...endocument

[karlmarx]

Somehow, I still can't quite convince myself of the attractiveness of such an industry, much less as an investment option, despite seeing all this interest here. 7 pages worth of comments!

you will be surprised by how some unlisted f&b businesses consistently achieve more than 15% net margins. another plus point is that f&b is non-cyclical, which allows for more stable/predictable earnings. soup restaurant is one of the best-managed listed f&b. the population boom in recent years and availability of inexpensive labour has benefited most f&b. the fact that harry's is border-lining when most are doing okay, tells you that there is something quite wrong with harry's.

macdonalds is one of the most efficient and innovative f&b. its low cost product and mass market customer base makes it recession proof, and its constant introduction of new products keeps its customers coming back. established f&b decline when they're unable to keep up with the market's demands for novelty/variety. burgerking failed in sg because its' same old offerings (while good) failed to maintain its customer base.

with so many bars all over the island, how does harry's compete with other bars? price? product? experience? i will say that harry's does not excel in any of these, or reasonably well in a combination of all these. and if it is not even able to adequately manage operational efficiency, growing revenue is more likely to lead to higher losses. harry's still faces the same problems as when it IPOed.

[pianist]

which are the other more attractive listed f&b counters besides harry and soup restaurant? do u find thai village good enough?
i remember the last time i bought something from mcdonald was in 2001 though i must salute its business model

[yaosheng]

you could consıder ABR holdıngs, whıch owns Swensens. It ıs partıcularly popular locally.

[karlmarx]

i hardly eat macs too, i find it too unpalatable to say the least. i think most adults tend not to eat macs.

i took a cursory look at thai village's latest AR and quarterly and noted that its NPAT has been down-trending over the last 10 years. i believe this is due to new competitors, one of which that came to my mind is seafood paradise (which will be seeking a listing soon). i haven't been to thai village so i'm not sure whether it has been less than creative in offering new products. lack of innovation plus new competitors could be the reason for its npat down-trend.

i think it is ok to expect an f&b's npat to plateau after awhile, since the market size is limited. i believe the key challenge is in maintaining the customer base over a long period of time. the business of good hawkers can last for decades, yet their offering remains the same, reason being their quality (product differentiation) is superior to competitors. does thai village offer the best sharks fin soup or chilli crab (or whatever)? or at least good enough such that customers remember and want to return again?

i also find it strange that they have more outlets operating in china than in singapore. the local market can support at least 10 outlets; 3 is far too few. if seafood paradise can operate more than 10 outlets locally, why does thai village not find it attractive enough to play on home ground?

but i do think that its financials look ok. its valuation reflect that of a declining business. if it somehow manages to turn around, then current price levels could be attractive.

swensens is doing more than ok. but its valuation make it unattractive.

[dydx]

On 27Sep11 (yesterday), CEO Mohan Mulani added another 348 lots (out of a total 418 lots transacted between $0.106 and $0.11) and paid an average $0.107977/share.....
http://info.sgx.com/webcorannc.nsf/Annou...endocument
With this purchase, Mr Mulani's total interest (including his deemed interest in the shares held by his wife, Rita Mulani) in Harry's now stands at 44.39%.