How Are Essential Services Stocks Faring During This Pandemic?

2020-07-13     thesmartinvestor
How Are Essential Services Stocks Faring During This Pandemic?

Singaporeans enjoy a good meal, and it can be argued that food is in our blood.

In the age of COVID-19, food and beverage (F&B) has been earmarked as one of the essential services that are allowed to continue operating during the COVID-19 pandemic.

Naturally, investors would expect this sector to be insulated from the troubles surrounding other badly-hit industries such as air travel and tourism.

However, there is a caveat here.

Social distancing measures, along with a “no dine-in” policy that was implemented during Singapore’s circuit breaker period, have led to lost sales for many F&B outlets.

Although delivery and takeaway are still allowed, these may not make up for the lost revenue from the absence of dine-in customers.

With that in mind, how are food stocks faring during this pandemic?

Tumbling revenue and net profit

The F&B industry has a wide variety of players, ranging from full-service restaurants (FSR) and quick-service restaurants (QSR) to food kiosks and cafes.

Companies such as Jumbo Group Ltd (SGX: 42R), RE&S Holdings Limited (SGX: 1G1) and Japan Foods Holdings Ltd (SGX: 5OI) operate full-service restaurants under various brand names.

Note that in the quarter ended 31 March 2020, social distancing measures had already exerted a mildly negative impact on F&B players.

For Jumbo, its first-half fiscal year 2020 revenue has tumbled 13.1% year on year.

RE&S reported a 14.7% year on year fall in revenue to S$30.3 million for the latest quarter, while Japan Foods provided a profit guidance stating that though revenue will be at similar levels for the fiscal year ended 31 March 2020, net profit was expected to be lower.

Meanwhile, food court operator Koufu Group Ltd (SGX: VL6) has temporarily suspended the operations of 10 food courts, 3 QSR and 2 FSR to reduce operating costs.

Though the exact financial impact is tough to quantify, the group did mention that total revenue on a same-store basis declined by 15% year on year for the period 1 January till 30 April.

There was a rare piece of good news in Kimly Limited (SGX: 1D0), a coffee shop operator with a network of 73 food outlets and 134 food stalls.

The group reported a 3.1% year on year increase in revenue for the first half of the fiscal year 2020, while net profit attributable to shareholders increased by 5.3% year on year.

However, it halved its interim dividend from S$0.0056 to S$0.0028.

Full impact during this quarter

Investors should note that the previous quarter’s numbers only captured part of the chaos wrought by the pandemic.

As the circuit breaker measures only kicked in on 7 April, the absence of dine-in customers means the numbers for the current quarter will look even worse.

To make things worse, the foreign worker population has been quarantined in their dormitories to prevent the spread of the virus.

The F&B sector traditionally relies on foreign labour, so this occurrence adds another layer of hardship for these businesses.

These factors will result in plunging revenues and cash flows for the firms above, and will also lead to growing losses.

Jobs support and rental rebates

Fortunately, the government has announced a slew of measures to help prop up these suffering businesses.

Already, three sets of Budgets (aptly named Unity, Resilience and Solidarity, respectively) have been announced since the pandemic broke out.

A fourth budget, called the Fortitude Budget, was announced just days ago, drawing down more of Singapore’s past reserves to save businesses and jobs.

The jobs support scheme (JSS) will provide up to 50% of wage support for employees in the food services and retail sectors, up to a maximum cap of S$4,600 in gross monthly wages.

And although circuit breaker measures will be eased come 2 June, dine-in will still not be allowed until the situation has been deemed safe by the authorities.

Companies that operate their food outlets within malls will also be receiving rental rebates from their landlords as part of tenant support measures designed to provide relief for beleaguered businesses.

Get Smart: Uncertain prospects

Although F&B has been designated as an essential service, the outlook remains challenging for companies within this industry.

Even after the pandemic has passed, there may be new rules on social distancing that limit the number of customers seated within a restaurant.

These rules, if implemented on a long-term basis, will inevitably alter the economics governing these F&B businesses.

Some may not be viable in their current form, while others may need to adapt quickly or risk going bust.

While relief measures such as JSS may alleviate some pain for businesses in the short-term, they do not provide an effective panacea for the sector’s long-term troubles.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.

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