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Can This Company Recover From a 59% Crash In Profit?

To celebrate the end of the Hungry Ghost Festival (traditional Chinese festival), a buffet dinner was recently catered for the block of flats where I stayed using money which each family living here had contributed to.

At first glance, the outward appearance of the decoration and food was mediocre, but the spread turned out to be rather appetizing. Being a curious and avid investor, I discovered that the catering outfit turned out to be Stamford Catering Services.

Unwilling to stop there, I continued my pursuit to see if it was a publicly-listed entity. Bingo! I found out that Stamford’s parent company is Select Group Limited (SGX: 5FQ), which actually has a host of other food & beverage brands under its umbrella. Some of Select Group’s more notable brands include Hong Kong Sheng Kee Dessert, Lerk Thai Restaurant and Peach Garden.

Interestingly, despite me being aware of local F&B companies like BreadTalk Group Limited (SGX: 5DA) and Japan Foods Holding Ltd (SGX: 5OI) due to my frequent visits to local shopping malls, Select Group had escaped my notice. Thus, I decided to probe further.

A history of Select Group

Listed on the Catalist exchange, Select Group has actually been serving a variety of delicacies to the whole of Singapore for over two decades.

Despite keeping a seemingly low profile, the company isn’t shy about trying to grow its business. In fact, it is looking to secure franchisees for the three F&B brands I mentioned earlier, namely Hong Kong Sheng Kee Dessert, Lerk Thai Restaurant, and Peach Garden.

Considering that Select Group started out delivering tingkat containers to households (i.e. household catering) in 1991, the company has come a long way since with its ventures into new concepts to expand its product offering.

How it has fared

A quick glance at Select Group’s financials show that it it has been able to grow its top-line and gross profit steadily over the past three years; from 2010 to 2013, revenue had grown from S$76 million to S$129 million while gross profit had increased from S$52 million to S$88 million.

However, the company seems to have ran into difficulties lately – its net profit had plunged by 59% from S$4.2 million in 2012 to $1.7 million in 2013. The fall in profit can be attributed to two main causes: 1) A rough 25% spike in rental expenses; and 2) a 21% surge in employee benefits-related expenses.

Select Group’s Chairman and Managing Director Mr. Vincent Tan Chor Khoon added more colour to the situation in the company’s 2013 Annual Report:

 “Increasing labour cost due to higher worker levy and tight labour market proved to be very challenging for us in FY2013. We believe that this trend will continue into FY2014. To better manage our labour cost, we have taken the move to embark on several productivity initiatives rolled out by the government. These strategies include looking into ways to enhance productivity and investing in high-end automated equipment, such as purchasing auto-wok equipment for our New Building, as well as exploring new technology in food processing and food.”

What’s next for Select Group

Although 2013 hasn’t exactly been a great year for Select Group, not all hope is lost. At the very least, the company has acknowledged its poor results (based on what Mr. Vincent Tan had written in the 2013 Annual Report)and are actively trying to improve its operations. Some measures, besides the ones previously mentioned, would involve closing down under-performing outlets and introducing new brands like Pho Street and Griddy.

Furthermore, the company has also managed to secure bigger headquarters (the New  Building mentioned earlier) to accommodate increased production capacity, logistics, and office support requirements. Lastly, Select Group has also been looking to expand overseas through joint ventures or franchise agreements. Currently, it is already evaluating potential business partners to franchise its Peach Garden and Hong Kong Sheng Kee Dessert brands in Cambodia, Vietnam, and Indonesia.

Foolish Bottom Line

With many different brands under Select Group, it may take some effort to fully understand how each one of them will contribute to the bottom-line. Furthermore, it remains to be seen if the new brands can help grow the company.

But regardless of what you think of this company as a potential investment, there’s still a valuable takeaway from this article: Fried chicken and fast food purveyor Texas Chicken is part of Select Group too. You can now impress your friends or dining partners with this nugget of information as it worked wonders for me – my girlfriend was impressed when I shared the information with her while we were dining there recently.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.