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Covid-19 has been very economically destructive for many companies around the world. Hong Kong-based fast-casual restaurant chain operator Café de Coral Holdings Limited (SEHK: 341) is no exception.
Shares of the leading restaurant chain in Hong Kong are down 12% so far in 2020 (at the time of writing), and trade at roughly where they were in 2009.
Given that Café de Coral recently reported its annual results for the year ended 31 March 2020, is a turnaround possible? Here’s more on the results and what investors should watch in future.
For the year ended 31 March 2020, Cafe de Coral’s sales decreased 6.2% year-on-year to HK$7.96 billion (US$1.02 billion).
Because Cafe de Coral has a lot of fixed costs that it can’t adjust down quickly, profit attributable to shareholders fell a lot further, by 87.1% year-on-year.
Performance in the second half was worse than the first half due to Covid-19, which really started doing damage at the beginning of 2020.
The coronavirus outbreak has hurt casual dining demand due to social distancing being difficult in restaurants and food delivery margins are generally not as great as in-restaurant margins.
To maintain healthy cash flow, the company’s board did not recommend a final dividend for the fiscal year.
In the previous fiscal year, the company paid a final dividend per share (DPS) of HK$0.65.
Although there are fewer reasons to own it without the final dividend, I think future profit expectations will increase as Hong Kong returns to normal.
Once things return to normal, Café de Coral’s earnings and dividend could begin to normalise and, as a result, the stock has upside.
Café de Coral’s current price is pretty attractive versus its normalised earnings potential.
According to Reuters, Café de Coral reported the following diluted earnings per share (EPS) – excluding extraordinary items – for the fiscal years ended 31 March:
Café de Coral diluted EPS for Fiscal Years (FY) (HK$)
According to Morningstar, Café de Coral also has a five-year average price-to-earnings (PE) ratio of around 24.51.
Taking the 2018 EPS low of HK$0.79 and multiplying that by the five-year average PE ratio of 24.51 gets an approximate normalised price of HK$19.36.
With Cafe de Coral’s stock price at HK$16.22 in late June, I think there is probably 19% upside in terms of just normalisation. If management executes on mainland China growth or gets margins higher, there is even more upside.
As it relates to its mainland China business (which accounted for 13.7% of total sales for the fiscal year), management said its:
“Mainland China business achieved encouraging performance with strong network expansion until the COVID-19 outbreak. The Group is confident of its business growth when the market situation recovers.”
Events that could help Café de Coral realise its normalised potential include Hong Kong restaurant dining activity return to pre-Covid-19 levels, the development of a successful vaccine (if it happens), and a dividend payment, whenever that might happen.
I think the stock could probably see an improvement in sentiment as we get closer to the beginning of next year, which is when many expect a Covid-19 vaccine to hit the market.
That being said, it might take a while for things to normalise, and there could always be things that go wrong that could send the stock lower.
Management thinks the coronavirus outbreak will still change business as usual even after coronavirus is gone.
If food delivery makes a bigger part of Café de Coral’s sales mix, it could be harder for management to realise pre-Covid-19 normalised earnings. This is still risk and it’s going to take great execution.
Foolish bottom line
Due to Covid-19, Café de Coral’s profits fell substantially for the fiscal year ended 31 March 2020.
However, the Covid-19 pandemic is most likely a temporary event and Café de Coral shares have upside once things begin normalising.
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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 Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.