SINGAPORE KITCHEN EQUIPMENT: High IPO expenses but priming for growth

SINGAPORE KITCHEN EQUIPMENT (SKE), as a listed company, is one of a kind. It designs, fabricates and sets up kitchen systems and equipment for customers which include hotels, restaurants and industrial kitchens.

Husband-and-wife team: Executive director Alan Lee oversees the technical and maintenance service division. MD Sally Chua is responsible for day-to-day management decisions, overall strategic and expansion plans. NextInsight file photo.The less glamourous aspect of the business is the maintenance and servicing of kitchens but the gross profit margin is just as delicious at around 30-odd percent.

Listed on Catalist in July 2013, SKE reported 1H revenue of $7.8 million (+42.5% y-o-y) but a net profit of only $400,000 (-73.5%).

The profit fall is explained in the financial statement but briefly the reasons include:

> One-off lower cost of equipment purchased in 2012 due to a bulk purchase discount. This resulted in the 1H2013 gross margin falling from 43.6% to 32.3%, which is within the normalised range.

> Other income fell by $674,000 mainly due to the absence of a gain on disposal of properties (which occurred in 1H2012).

> Admin expenses jumped by $585,000 mainly due to IPO-related fees of $78,000, a disbursement of directors' fee of $225,000 in 1H2013 instead of in 2H2012, and a $220,000 increase in salary expenses from a higher headcount.

Positive news

It has declared an interim dividend of 0.25 cent a share, which is 100% of its 1H earnings and translates into a yield of 1.6% based on a recent stock price of 15.5 cents (IPO: 20 cents).

Business-wise, its 2H is a stronger half --- about twice as strong -- because of year-end festivities and a peak in wedding celebrations, for example, according to management during a results briefing this week.

However, because the company's IPO was launched in July, there are related expenses that will show up only in its 2H results -- about $700,000, to be more exact.

As a result, the financials for FY13 might disappoint some investors but the income statement is expected to normalise next year and is expected to show growth.

Interesting insights 

SKE does maintenance and servicing for about 1,000 clients a year. This business segment brought in $2.6 million in revenue in 1H2013.

The average works out to $5,200 per customer per year on an annualised basis, with some customers contributing as low as a few hundred dollars a year and some customers, a few hundred thousand dollars.

The work involves repairs, cleaning and degreasing of kitchen equipment, including exhaust hoods, ducts, and exhaust motors. In addition, SKE's licensed gas service workers can construct and repair gas pipes and fittings, as well as install, repair and test gas appliances and gas meters.

The 70-strong SKE team is the biggest in the industry in Singapore, and also does maintenance and servicing of equipment not originally purchased from SKE.

Fortifying SKE's dominance in this segment is the fact that its technicians have a slew of certificates which are required for them to operate.

Competitors, who are mainly small teams, find it costly and a hassle to send their workers for training and qualifying for the certification.

In its fabrication and distribution business segment, SKE derive lots of work for F&B operators who find it necessary to refurbish or upgrade or replace their kitchen equipment every 2-3 years as a result of heavy daily usage.

Eugene Wong is a non-executive director of SKE and owns 4.5 m shares of SKE. Photo: http://beantherecountthat.sgAnother revenue source for SKE arises from the rental revisions of commercial space that kick in every few years, which result in incumbent F&B operators moving out and new players moving in.

These tenant changes result in orders for kitchen equipment.

Future endeavours:

1. SKE is targeting the Myanmar and Cambodian markets, and looking for local partners.

2. SKE is venturing into the business of re-conditioning used kitchen equipment and re-selling it to F&B operators with tighter budgets.

The equipment is given away free by F&B operators who move shop or quit the business. 

3. SKE is targeting coffeeshop operators, hawkers and food court stall owners as additional revenue streams for its maintenance and servicing business segments.

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