Soup Holdings is a long-standing name in the domestic F&B industry. The company was incorporated in 1991 and listed on the Singapore Exchange S68 (SGX) mainboard in December 2009. Currently, Soup Holdings 5KI trades at 7.8 cents with a market cap of $21.8 million. Given its relatively small size, along with low investor participation in the stock in terms of trading volume, we think Soup Holdings is undervalued, particularly from a financial and quantitative standpoint.
Based on its latest 1HFY2023 ended June results, more than 80% of its revenue and 90% of its profits are derived from restaurants operated under brands such as Soup Restaurant, Teahouse, Cafe O, Pot Luck and Little Teahouse. The second segment is food processing and distribution of its own brand of ginger sauce via supermarkets and other retail channels although this means the company is overly reliant on ginger, where its harvest is subject to the vagaries of nature. However, the company has clearly stated that its businesses are not affected significantly by seasonal or cyclical factors. In other words, the business risk is not concentrated and supports the case to invest in the company.
Investors should be worried if companies are stagnant in terms of their business plans in a highly competitive industry such as F&B, as companies that lag in terms of adapting to market needs will erode the value of the business.
To have a greater competitive advantage and margins, Soup Holdings has stated plans to remain relevant in the industry, such as investing in digital solutions, which greatly increases operating efficiency and customer engagement. It is eyeing new markets overseas, too, for its sauces.
Also, given a positive outlook for the food processing and distribution business, Soup Holdings is expected to have more competitive margins, at least over the short term. Stating intentions to improve the business is one thing, but the capacity to execute it is a different issue. Given Soup Holdings’ ample cash reserves, along with consistent cash flow, it is highly likely that the company will be able to execute its plan without further incurring additional financial risk through borrowing.
From a financial and quantitative standpoint, the company has been very consistent in its financials. Before delving deeper into the financial aspects of the company, it is important that investors, particularly fundamental and value-based, understand the relationship between price and value of a company. As long as the value of the company exceeds the price of the company, it is deemed undervalued.
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Specifically, we can compare the growth in the weighted value of the company against the growth in price of the company over multiple periods. The chart “Soup Holdings’ price growth vs weighted value growth” illustrates Soup Holdings’ price-to-value growth — and it is clear that the company is undervalued. The weighted value of the company is comprised of its revenue, earnings, operating cash flow and free cash flow in order of increasing weight.
Over the past 15 years, Soup Holdings has reported positive net income and operating cash flow every year consistently, with free cash flow as well except for one year. Its profitability, measured through its return on equity and net income margins, is low on an absolute basis but given Soup Holdings is in a highly competitive industry, it is decent and growing over the past three years.
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Indeed, the strongest financial component of Soup Holdings is its cash flow — of which its operating and free cash flow margins are 20.7% and 20.2% respectively — reflecting a strong competitive advantage. The cash is what the company keeps at the end of the day, and is often overlooked by investors who prioritise the net income of a company. We think the large disparity between Soup Holdings’ net income and cash flow is a significant contributing factor to why it is undervalued.
Yields measure the attractiveness of a company relative to the risk-free rate and peers, and Soup Holdings does well in this aspect. Its net income, operating cash flow and free cash flow yields are 8.1%, 39.1%, and 36.5% respectively, which is more attractive than the risk-free rate of 2.9%. The projected dividend yield of 2.6% is however not so, but it is important to note that Soup Holdings has paid dividends every year since IPO, though the amount has varied. Compared to local peers, it trades at 22.5%, 56.3% and 13.6% discount for its forward P/E, EV/Ebitda and P/B multiples respectively, indicating that it is very cheap at current prices.
In terms of financial safety, Soup Holdings stays true to its name, with a very liquid balance sheet. The company’s cash ratio, quick ratio and current ratio are 1.26, 1.34 and 1.56 times respectively, indicating that it has ample liquidity for any short-term obligations or liabilities. Soup Holdings is also net cash, indicating that solvency risk, which is the ability of the company to meet its long-term obligations or liabilities, is minimal.
Given its healthy balance sheet, along with its strong cash flow generation ability, investors would be surprised as to why the company has not been privatised or taken over — the only likely reason is the company’s relatively high P/B at 1.88 times. However, Soup Holdings is not as capital-intensive of a business compared to other businesses from different industries. The proof is that its capital expenditures have been no more than 30% of its operating cash flows over the past five years. This implies that the P/B multiple is less relevant or practical in determining the company’s fair or intrinsic value.
It is important to note that the smaller the company, the higher the investment risk, as prices can be much more volatile. This is further exacerbated by Soup Holdings’ low float of around 25% and low trading liquidity, with its average daily volume of 30,000 shares over the past year, which translates to around 0.01% of its market cap. A relatively large buy or sell order can significantly change the share price and returns to investors.
However, this risk is slightly offset by its one-year beta of 0.71. The beta measures how volatile a stock is compared to a benchmark, in this case, the Straits Times Index. A beta lower than 1 indicates that the company is less volatile and reduces risk to the portfolio, which is a positive merit for investing in Soup Holdings given its high investment-risk profile.
Our subjective analysis prices Soup Holdings’ intrinsic value at 13.2 cents, which is around 70% above its current trading price. There is also no analyst coverage on Soup Holdings given its micro-cap size and relatively illiquid trading interest.
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Hence, we reiterate that the probability of this company being undervalued is highly likely, and would be suitable for investors seeking to add risk to their overall portfolio. It is a stock to take an interest in, given its long history of consistent financial performance.
