Brokers' take: SAC Capital initiates 'buy' on ST Group Food with S$0.26 target price

SAC Capital has initiated coverage on the Catalist-listed food and beverage (F&B) operator ST Group Food Industries,DRX : DRX 0% with a "buy" call target price of S$0.26.

In a report on Monday (Nov 29), SAC's analyst Peggy Mak highlighted that the group is an F&B operator with a "strong brand portfolio" and believes it will continue to add on to its portfolio of outlets in the coming years.

Despite Covid-induced lockdowns, the group had a net addition of 14 outlets in FY2021, with "keen interests from sub-franchisees", the report noted.

Mak said there are 3 main driving factors behind the creation of new outlets. They are the use of easy-to-prepare food concepts that are suitable for delivery and takeaway, outlets adopting a combination of quick service retail model and dine-in, as well as a 3000 square metre central kitchen in Melbourne which cuts the need for shop space and staff. The semi-processed food supplied from the central kitchen reduces preparation time and enables a quick turnaround.

The group, headquartered in Melbourne, owns exclusive franchise and licence rights to brands like PappaRich, NeNe Chicken, Hokkaido Baked Cheese Tart, Gong Cha, Ippudo, Go Noodle House and i Darts for Australia, New Zealand, the United Kingdom and Malaysia. It also owns 2 Japanese dessert brand concepts Pafu and Kurimu. It has 133 outlets as at end Sep, 2021. 49 are owned, 84 are franchised.

The group should benefit from the more rapid re-opening in Australia, which should on the whole lift the country's gross domestic product in Q4 this year and in 2022, Mak said.

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Pointing out that students are a "significant customer base" for the company with some 10 per cent of its outlets located at university campuses, Mak views that Australia's border reopening to visa holders and students will also positively impact the company's business.

The target price of S$0.26, is derived from discounted cash flow as well as a 18.7 per cent weighted average cost of capital.

The analyst's projections assume a net addition of 15 outlets each year, of which two-thirds are sub-franchised.

"We conservatively estimate sales per outlet in FY2022 and FY2023 at 70 per cent and 80 per cent of FY2019's level. There is upside risk to our forecast if the recovery turns out stronger," Mak said.

The downside risk to the forecast is a roll back of re-opening plans in the countries the group operates in, added Mak.

Shares of ST Group Food remained flat at S$0.15 as at 4.07pm on Nov 29.

Read more: 

• ST Group Food Industries scales up its business amid pandemic

• ST Group Food's JV partner Papparich Group Sdn Bhd to wind up

• ST Group Food Industries to open 10 new F&B outlets