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Having recently published in a recent news article on 18 Aug 2014, Sakae Holdings (SGX: 5DO) has stated that it is expected to diversify into the financial business as My Douglas Foo, Chairman of the Group plans to leapfrog the company into a global brand. However, should this be a cause of concern for investors of Sakae Holdings?

 

Company Background

Sakae Holdings was founded in 1996 with its first outlet established a year later. Since then, the company has grown into a myriad of restaurants under its main brand, Sakae Sushi. These outlets include Sakae Teppanyaki, Hei Sushi, Senjyu (a mid-upscale Japanese restaurant), Sachi, Sakae Express, Nouvelle Events, Sachi and Crepes & Cream. The Group’s concept of quick service and trendy Kaiten (conveyor belt) sushi has allowed Sakae Holdings to grow over more than 100 outlets across Asia including Japan, Thailand, Malaysia and Vietnam.

 

Food & Beverage is a Tough Business

The decision to diversify into a finance-related business was somewhat perplexing although it could be understood. As a Singapore-based F&B company, Sakae Holdings faces intense competition from other similar restaurants. Cosmopolitan cities such as Singapore tend to have a well-developed F&B industry with food outlets offering a wide variety of creative food products and innovative store layouts in order to capture consumer tastes. Combined with a high labor and rental costs of running a local café or restaurant, food operators generally face a tough fight.

 

Execution Risks

As stated by Mr Foo, “Revenue for the investment business will come from capital gains and recurring dividend income from Sakae’s investments in securities of the investee companies, while that for the fund management business will come from management fees and performance fees. Revenue for the advisory business will come from consultancy fees and commissions.” Having no prior experience in the financial business, one should question management’s execution capability and ability to generate sustainable profits from the finance business.

 

Moreover, the required S$10 million capital outlay would expense its entire cash balance of S$11 million (as at Jun-2014). With the Group’s vision and mission to “build global brands” and to “provide safe quality food with excellent service at the best value”, it would be interesting to see how management intends to further fund its main business’s future expansions.

 

Value in Action

Similar to a previous article written, companies with a “strategic shift” in its business model should be critically judged. Investors should understand the reasons for such change and appreciate how such diversification would impact its main operations.

 

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All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie does not own any shares in the companies mentioned above.

 

 

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