SINGAPORE

INITIATION REPORT 30 August 2013

Singapore Kitchen Equipment Ltd

Service Has A Name

Recommendation: Price / Tgt. Price: Mkt. Cap: Board / Sector:

HOLD SS$0.151/ S$0.173 S$22.7m Catalist /Consumer Discretionary

SKE SP

CIMB Research Pte Ltd +(65)-6225-1228

A chance to own a key player in a niche industry. SKE is an established player

in the commercial and industrial kitchen solution provider industry, serving notable customers from the F&B and hospitality segments. The IPO will provide greater brand visibility and credibility to further reinforce its market position. Poised for growth. Post IPO, SKE will be using part of the proceeds to invest in new equipment and talent training to expand its current capacity in both the fabrication and maintenance segments. This places SKE in a favourable position to ride on the growth of the local F&B and hospitality segments following the recovery of the Singapore economy and the rising influx of tourists. Expansion into ASEAN comes with uncertainty. SKEs plan to expand into the ASEAN markets through joint ventures and strategic alliances is promising given the strong expected yoy growth from these countries. However, such an expansion plan comes with uncertainty as there are issues of licensing, foreign exchange controls and availability of partners which are not within the control of SKE. Reasonable dividend yield with a 40% dividend payout ratio for FY13-15. SKE is committed to paying out at least 40% of its net profits as dividends for FY13FY15, representing a reasonable dividend yield of 3.4%- 3.7%. With strengthening cash flows, we believe this is an achievable target. Initiate with Hold and target price S$0.173. Using closest peer Fujimak Corporations 6 years historical average forward P/E of 10.1x on our CY14 EPS of 1.71 Scts, we derive a target price of S$0.173.

Financial summary
FYE Dec - S$m Revenue ($ m) yoy grow th (%) EBITDA ($ m) EBITDA margins (%) Pretax profit ($ m) Net profit ($ m) yoy grow th (%) EPS (S cts) EPS grow th (%) P/E (x) Gross DPS (S cts) Dividend yield (%) P/NTA (x) NTA/sh (S cts) ROE (%) Net gearing (%) P/CF (x) EV/EBITDA (x)
Source: Company, CIMB Research

2011 16.4 8.1 2.6 15.6 2.6 2.3 206.0 1.8 206.9 8.5 nm 3.2 4.7 38.1 22.2 7.6 7.3

2012 16.6 1.3 2.8 16.8 4.3 3.8 69.8 3.0 69.1 5.0 nm 2.0 7.6 39.8 cash 4.7 6.7

2013F 17.1 3.0 1.8 10.3 1.6 1.4 (62.5) 1.0 (68.2) 15.8 0.4 1.9 1.6 9.2 10.4 cash 13.9 10.7

2014F 17.6 2.9 3.2 18.2 2.9 2.6 78.6 1.7 78.6 8.8 0.7 3.4 1.5 10.2 16.8 cash 7.8 5.9

2015F 18.1 2.7 3.4 18.8 3.2 2.8 7.6 1.8 7.6 8.2 0.7 3.7 1.3 11.3 16.3 cash 7.3 5.5

Market capitalisation & share price info

Market Cap 12-mth price range 3-mth avg daily volume # of shares (m) Est. free float (%) Wrts/ICULS o/s (m) Strike price (S$)
Source: Bloomberg

S$22.65m S$0.15/S$0.195 na 150 15.17% -

Share price pref. (%) Relative Absolute Major Shareholders QKE Holding Pte Ltd Sirius Venture Capital Pte Ltd

1M 0.8 (6.2)

3M na na

12M na na % held 81.7% 3.2%

12

Background
Since its inception in 1996, Singapore Kitchen Equipment Pte Ltd (SKE) has grown to become one of Singapores leading commercial and industrial kitchen solution providers for the F&B and hospitality services industries. Its key competency lies in its ability to provide a one stop kitchen solution where it offers design and consultancy services for the setting up and maintenance of commercial and industrial kitchens, fabrication, installation and sale of a wide range of kitchen systems as well as kitchen equipment. In addition, SKE offers maintenance services on kitchen equipment to facilitate the growth and operation of F&B and hospitality businesses based in Singapore. Some of its notable customers include central kitchens, integrated resorts, hotels, government agencies and restaurant. Apart from the commercial sector, SKE also targets residential household that requires customized industrial style kitchen.

Segments
SKEs business can be broken down into 2 segments: Fabrication and Distribution Segment. This segment involves the manufacturing and sale of kitchen and refrigeration equipment under the brands InnoFlame and Qoolux respectively. It also distributes established overseas kitchen equipment brands. In addition, it provides design consultancy and installation of these kitchen equipment and systems. Being the bread and butter of SKEs business operation, this segment contributes the majority of the groups revenue (64.9%) with a gross profit margin of 42.3%. Over the past 2 years, the groups Fabricatio n and Distribution segment has enjoyed an average revenue growth of 4.6%. This was driven by the increase in demand for in-house kitchen equipment coupled by the groups effort to market their products through the media and existing relationship with customers. With the groups intent to expand its operations in Malaysia and Vietnam, we expect to see further growth in this segment.
Figure 1: SKEs Brands and Product Offering
Brand Name InnoFlame Product Offering Kwali range (with blower), boiling pan, gas convection oven, char broiler, steamer, duck/pig roaster, noodle broiler, steamer cabinet, salamander, fryer, stock pot stove, portable gas range, bainmarie and electric convection oven

Qoolux

Two/four/six-door upright air cooling refrigeration, pizza air piping worktable refrigeration, salad air piping refrigeration bench, air piping sliding door showcase, chocolate/wine showcase

Third Party Brands

Blast freezer chillers, chiller showcases, cooking ranges and oven, combi steamers, dishwashing machines, holding cabinets, refrigeration cabinets, tilting kettles and skillets

Source: Company

13

Maintenance and Servicing Segment. This segment involves the provision of preventive maintenance on kitchen equipment as agreed under the annual maintenance agreements with customers. It also carries out urgent repairs and cleaning for customers on an ad-hoc basis. More recently, with the in-house licensed gas service workers, it offers construction and repair of gas pipes and fittings. This is the smaller its two business segments, contributing only 35.1% to the groups revenue with a gross profit margin of 33.7%. The segment enjoyed a one-off growth of 15.4% in FY 2011 which was largely attributable to a one year service contract worth S$0.7 million which expired in FY2012. Nonetheless, we still expect this segment to experience continued growth amidst the expansion of the F&B and hospitality industry. This is in line with the groups intention to grow the current servicing fleet of 17 vans and 50 technicians.
Figure 2: SKEs Revenue breakdown for FY 2012

Source: Company

Figure 3: SKEs Revenue (S$ million) and GPM (%) from FY2010 to FY2012

Source: Company

14

Competitors
Due to the low barriers of entry, the commercial and industrial kitchen solution provider industry is one that is fairly fragmented with numerous players competing for market share. Notable competitors (not listed) for SKE are Continental Equipment Pte Ltd, Fabristeel Pte Ltd and Somerville Pte ltd.
Figure 4: Peers Description
Name Continental Equipment Pte Ltd Description Continental is a manufacturer, specialist contractor, distributor and supplier of commercial refrigeration, institutional kitchen and food service equipment. A total service is to provide to customer from consultancy, planning and designing of their food service facilities, to project management, fabrication, import, supply, installation, after sales service and maintenance of equipment. Headquartered in Singapore, Fabristeel is an international company with manufacturing and production facilities, supply chain networks, sales offices and service networks in a variety of countries worldwide. Fabristeel provides solutions to the food service industry with its turnkey services, from restaurant concept and facility design, to equipment specifications, in-house fabrications, installation and maintenance. Somerville has been in operation for more than 50 years and has a full regional service centre Asia Pacific Region. Somerville provides a complete package in design, planning, supply, installation, after sales and maintenance service for commercial kitchen and laundry equipment.

Fabristeel Pte Ltd

Somerville (Singapore) Pte Ltd

Source: Company

Industry Outlook
Cautiously positive economy backed by a growing population. Despite fiscal cutbacks in the US and recession in the EU, the global economy has gradually stabilized with Asias growth expected to be moderate due to reasonable domestic demand. In view of this macroeconomic backdrop, the outlook for the Singapore economy is likely to remain cautiously positive. While the Ministry of Trade has forecasted a GDP growth of between 2.5-3.5% for 2013, we can expect to see a GDP growth of 5% by 2016 (Figure 5). Such a recovery will instill consumer confidence which will encourage spending. We believe that Singaporeans with more spending power will choose to dine out, contributing to the growth of the F&B industry. The growth of the F&B industry will be further boosted by the governments plan to achieve a population of 6.5m from the current 5.3m. This significantly increases the consumer market by 23%, providing the F&B segment with growth opportunities to capture more market share. This is in line with Euromonitors growth forecast on transactions in consumer food service, averaging a yoy growth of 1.75% for the years 2013 to 2016 (Figure 6). Ultimately, we expect the F&B industry to carry on its steady growth which will in turn drive the demand for services from the commercial and industrial kitchen solutions providers.
Figure 5: Singapore Real GDP (%)

Source: EIU Market Indicators

15

Figure 6: Transactions (mn) for consumer food service

Source: Euromonitor

Resilient growth from the hospitality industry. Since the transformation of the marina bay area and the introduction of integrated resorts, Singapore has experienced resilient growth in its hospitality industry. Singapore welcomed 14.4m unique visitors in the year 2012, representing a 9.1% yoy growth from 2011. To accommodate the rising influx of tourist, more hotels have been built. According to Marketline, Singapores hotel volume enjoyed a strong growth of 6.8% in 2012 and is expected to persist with a CAGR of 6% from 2012 to 2016 (Figure 7). The number of hotel and motels is expected to hit 419 by the end of 2016. With many new and existing hotel kitchens looking to be furbished and maintained, there will be opportunities to secure new contracts on top of the F&B sector. We believe this can be an important catalyst for the industry over the next few years.
Figure 7: Singapore hotels & motels industry volume forecast (units), 2011- 2016

Source: Marketline

16

Improving margins with cheaper steel prices. Stainless steel forms a significant component (approximately 70%) of the cost of sales for commercial and industrial kitchen solution providers. Steel prices have been on a downward trend since 2011. We expect prices of stainless steel to persist in this downward trend due to sluggish demand coupled with excess steel capacity. This would come as a boost to commercial and industrial kitchen solution providers as it pushes down the cost of sales, enabling the industry to achieve better gross margins.
Figure 8: Composite Stainless Steel Price in Asia (US$/ton Value)
360 0
340 0 320 0

300 0 280 0 260 0 240 0 220 0 200 0

Source: MEPS

Company Outlook
Riding the growth of developing ASEAN economies comes with uncertainties. In view of the strong yoy growth in developing ASEAN economies (Figure 9), SKE will be using approximately S$1.6 million from its IPO proceeds to expand its existing operations in Malaysia and Vietnam and to break into new markets such as Myanmar and Cambodia. Management has indicated its willingness to engage in acquisitions, joint ventures or strategic alliances with parties who can help strengthen its market presence and network in the above mentioned countries. We are however concerned with SKEs ability to seek out sufficient partners to scale up its foreign operation. This could be further complicated by issues of licensing and foreign exchange controls which are not within SKEs control. Nonetheless, if executed successfully, this would be a quick and efficient manner for SKE to capture market share in these markets. SKE will not only be able to enjoy higher revenue growth but also a diversification of its revenue source, reducing its dependency on the Singapore market which currently contributes 90% of the groups revenue.
Figure 9: Year-on-year growth rates (%) of developing ASEAN economies

Source: International Monetary Fund

17

Building capacity and capabilities. SKE has plans to set aside S$700,000 from its IPO proceeds to invest in additional fabrication equipment and machinery. This would likely involve the purchase of laser cutting machines that are capable of incorporating designs and specifications codes from the CADCAM system. We believe this would help reduce material wastage from erroneous fabrication and improve SKEs capacity to comfortably handle the increase in demand for kitchen equipment and solutions over the next few years (Figure 10). In addition, we expect management to increase its existing servicing fleet by 20%, representing a fleet of 25 vehicles and 60 technicians by 2014 (Figure 11). On the whole, we believe SKE is well poised to handle the growth of the F&B and hospitality sector.
Figure 10: Equipment and Stainless Steel Annual Productive Capacity (units)

Source: Company and CIMB research

Figure 11: Servicing Fleet (Technicians and Vans)

Source: Company and CIMB research

18

Leveraging on its competitive edge. SKE has become a key player in the commercial and industrial kitchen solution provider industry due to its five key strengths Convenience, Reputation, Variety, Track Record and Management. Looking ahead, we expect the group to sharpen and leverage on its key strengths which will help secure its foothold as a major player in the industry. This is further supported by the VRIO analysis (Figure 13) which affirms that many of the above mentioned strengths are hard to replicate
Figure 12: SKE Key Strengths
One stop service. SKE is capable of providing an efficient one-stop service which includes the provision of design and consultancy services for the setting up and maintenance of commercial and industrial kitchens, fabrication and sale of a wide range of kitchen system as well as kitchen equipment. With the integration of design and consultancy, fabrication and sale, installation and commissioning, and maintenance and servicing, SKE is well positioned to be one of the leading kitchen equipment providers in Singapore. Established reputation. With more than 15 years of experience in this business, SKE has established itself as a major player in the commercial and industrial kitchen equipment industry. Besides carrying major brands in kitchen systems, kitchen equipment, and accessories, SKE has also built strong brand identity through their Qson brand name, which has come to be associated with high quality kitchen equipment, reliable turnaround time and our consistent ability to meet their customers needs. Their association with major players in the F&B industry has enabled them to become one of the leading kitchen equipment players in Singapore. Moreover, with the upcoming IPO, SKE branding would be further recognized, facilitating the capture of more contracts from the more established F&B outlets and Hospitality related businesses. Extensive product range. SKE has established more than 15 partner brands in the kitchen equipment industry. This has placed the Group in a unique position as a local player with a multi-brand and multi-product portfolio serving Singapore and Southeast Asia. SKE extensive product range allows them to meet the requirements of the F&B and hospitality services industries. Strong track record in maintenance and servicing. SKE have a strong track record in providing maintenance and servicing of kitchen equipment and, in particular, preventive maintenance works and repairs carried out under the preventive annual maintenance agreements which they have entered into with their customers. The strong track record serves as a competitive advantage for us to secure new projects. Experienced and committed team of senior management. SKEs Managing Director, Sally Chua, has been instrumental in the formulation of their strategic directions and expansion plans. SKEs Executive Directors, Frankie Cheng and Alan Lee, have extensive knowledge in kitchen equipment fabrication and technical services and maintenance services, respectively, which provides SKE its competitive strength in these areas. Together with the support from a team of managers, SKE have successfully and progressively expanded their portfolio of projects and business over the years.
Source: Company

Figure 13: VRIO analysis on SKEs Key Strength

Valuable? Convenience Reputation Variety Track Record Management Yes Yes Yes Yes Yes

Rare? No Yes No Yes Yes

Costly to imitate? Yes Yes No Yes Yes

Exploited by the group? Yes Yes Yes Yes Yes

Competitive implication Competitive Advantage Competitive Advantage Competitive Parity Competitive Advantage Competitive Advantage

Source: Company and CIMB Research

Figure 14: SWOT analysis

Major player in the industry Convenience/One stop solution Established Reputation Wide range of products/services Strong track record Experienced Management

Strengths

Targeting more established F&Bs and Hotels in the local market Moving into developing ASEAN economies

Opportunities

Financial performance is dependent on the ability to secure new contracts Moderate utilization rate Dependent on human capital (technicians) which can be costly to train
Source: CIMB Research

Weaknesses

Volatile steel prices Unfavourable changes in foreign labour policies Unfavourable changes to the tourism and F&B sector

Threats

19

Risks
Financial performance dependent on SKEs ability to secure new contracts. Majority of the revenue (64.9%) is contributed by the fabrication and distribution segment which is project based in nature. This result in revenues that may not be recurring should SKE fail to secure new contracts. Nonetheless, we believe such a scenario is unlikely given that F&B and hospitality segment will be expanding in the coming years. Leveraging on its existing relationship with customers, coupled with continued marketing, SKE will be able to secure new contracts. Moreover, with the IPO, we believe it would provide further brand visibility and credibility which will enable the company to secure contracts from the more established F&Bs and Hotels. Looking at SKEs management plan, we also note its intentions to expand the servicing fleet. This will help build up revenue from the maintenance and servicing segment which are more recurrent in nature since servicing contracts are usually automatically renewed unless requested otherwise by customers. Dependence on skilled foreign labour. SKE relies heavily on foreign workers for its day to day operation. In Singapore alone, foreign workers account for 55.1% of the workforce. This includes workers from China, Malaysia and Vietnam. Any change in foreign worker policies could significantly increase SKEs cost of sale and its ability to grow due to the lack of access to labour. A second issue relates to the cost and time to train an SKE employee. SKE invests heavily on the development of its foreign labour. It would be detrimental to the business should an employee choose to leave the company. Nevertheless, SKE practices an incentive driven culture which we believe would be effective in retaining employees. In the long run, successful employee retention would build up a sizable skilled technician force that is capable of servicing a wide range of kitchen equipment, thereby allowing SKE to secure more servicing contracts.

Financials
Steady revenue growth. Although revenue only grew by 1.3% yoy in FY 2012, we expect to see steady revenue growth between FY13 to FY15 with a CAGR of 2.8% (Figure 15). This is in view of the expansion within the F&B and Hospitality segment which we believe will present SKE with more business opportunities. In addition, we expect SKEs foreign ventures in emerging countries to show some contributions.
Figure 15: Revenue (S$mil) growth trend

Source: Company and CIMB research

20

Recovery in core net profit. In terms of core net profit, we expect a dip of 34% yoy in FY2013 (Figure 16). This is largely due to a one off IPO expense which amounts to a significant S$1.3 million. Going forward, we expect to see a recovery in core net profit where SKE should achieve S$2.6mil and S$2.8 for FY2014 and FY2015 respectively. This represents a healthy core net profit margin of approximately 15% which we attribute to cheaper raw materials and efficiency gains.
Figure 16: Core Net Profit (S$mil) and yoy growth (%)

Source: Company and CIMB research

Strengthening cash flows. SKE practices an initial down payment of 20% upon project engagement with the remainder due upon project handover or with a 30 day credit limit depending on whether it is a new or existing customer. Such a business practice allows SKE to enjoy a moderately strong cash flow, where net cash generated from operations achieved S$2.6mil in FY 2012 (Figure 17). We believe cash flow from operations will continue to improve.
Figure 17: Cash Flow from Operations (S$mil)

Source: Company and CIMB research

21

Reasonable dividend yield. For the next three years, management has indicated its intention to distribute out dividends of not less than 40% of its profits. This represents reasonable a dividend yield of 3.4% and 3.7% for FY 2014 and FY 2015 respectively.
Figure 18: Dividend Yield (%)

Source: CIMB research

Valuation and recommendation

Given that SKE is the first commercial and industrial kitchen solution provider to be listed in Singapore, we turned to other exchanges in search of comparable peers to conduct our relative valuation. The peer group (Figure 23) that we have generated consists of 2 segments. They are namely the commercial kitchen solution provider and the household kitchen solution provider. We have chosen to include household kitchen solution providers as they are in a similar business as SKE in terms of manufacturing kitchen equipment and are generally smaller in terms of market capitalization. We initiate coverage on SKE with a target price of S$0.173, based on Fujimak Corporations 6 years historical average forward P/E of 10.1x on CY14 EPS. Fujimak Corporation is the closest peer with a similar business model and market capitalization.
Figure 23: Peer comparisons
Bloomberg Ticker SKE SP Price (lcl curr) 0.15 Target Price (lcl curr) 0.17 Market Cap (US$ m) 18 Core P/E (x) CY2013 CY2014 15.8 8.7 3-year EPS CAGR (%) -15.1% P/BV (x) CY2013 9.20 Recurring ROE (%) CY2013 10.4% Dividend Yield (%) CY2013 1.9%

Company Singapore Kitchen Equipment L

Recom. Hold

Commercial Kitchen Solutuion Provider Middleby Corp MIDD US Fujimak Corp 5965 JP Fukushima Industries Corp 6420 JP Rational AG RAA GR Maruzen Co Ltd-General Comm 5982 JP Simple average Household Kitchen Solution Provider Zhongshan Vantage Gas Applia 002035 CH Hefei Meiling Co Ltd 200521 CH Wuxi Little Swan Co Ltd 200418 CH Rinnai Corp 5947 JP Guangdong Homa Appliances C 002668 CH Hisense Kelon Electrical Holdi 921 HK Simple avearge

Not Not Not Not Not

rated rated rated rated rated

184.9 698.0 1,623 227.9 840.0

na na na na na

3,533 51 365 3,438 169

23.5 3.7 11.6 27.6 7.5 14.8

19.9 na 10.6 24.4 6.7 15.4

18.7% -43.4% -32.8% 8.3% 6.8% -8.5%

na na na 9.70 0.68 5.19

17.8% na 13.8% 36.6% na 22.7%

na na 0.9% 3.0% 2.1% 2.0%

Not Not Not Not Not Not

rated rated rated rated rated rated

11.50 3.86 7.89 6,850 15.10 5.60

na na na na na na

540 437 768 3,645 408 1,564

13.5 9.6 8.9 17.3 13.0 6.8 11.5 13.2

11.3 7.7 7.4 16.1 11.3 5.8 10.0 12.7

22.7% 23.1% 21.4% 5.9% 10.4% na 16.7% 4.1%

2.63 0.36 0.98 1.85 1.89 na 1.54 4.17

21.4% 7.9% 10.4% 11.3% 13.5% 31.9% 16.1% 19.4%

2.5% na na 0.9% na na 1.7% 1.9%

Simple average (ex Singapore Kitchen Equipment Ltd)

Source: Bloomberg, Company, CIMB Research

22

Figure 24: Fujimak Corporations average historical forward P/E

Source: Bloomberg, Company, CIMB Research

23

20 February 2012

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Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

RETAIL RESEARCH RECOMMENDATION FRAMEWORK* STOCK RECOMMENDATIONS

BUY: The st ock's total return is expect ed to be +15% or better over the next three months. HOLD: The stock's total return is expected to range between +15% and -15% over the next three months.

SECTOR RECOMMENDATIONS
OVERWEIGHT: The indust ry, as def ined by t he analyst's coverage universe, has a high number of stocks that are expected to have total returns of +15% or better over the next three months. NEUTRAL: The industry, as defined by the analyst's coverage universe, has either (i) an equal number of stocks that are expected to have total returns of +15% (or better) or -15% (or worse), or ( ii) stocks that are predominantly expected to have total returns that will range from +15% to -15%; both over the next three months. UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of -15% or worse over the next three months.

SELL: The st ock's total return is expected to be -15% or worse over t he next three months. CIMB Research Pte Ltd (Co. Reg. No. 198701620M)