IN one corner of TGI Friday’s (TGIF) restaurant at The Curve, Mutiara Damansara, some staff members are belting out a familiar birthday song. Their enthusiasm makes up for their lack of musical flair, but that somehow adds to the appeal.

In another corner, Chaswood Resources Holdings Ltd managing director Andrew Roach Reddy is watching them intently during an exclusive interview with The Edge. Chaswood (fundamental: 0.4; valuation: 0.0) has a mandate to set up and manage TGIF in Malaysia and has outlets in Thailand, Indonesia and China.

Apart from TGIF, some of the other brands under Chaswood include Malone’s, The Apartment, Watami, Bulgogi Brothers and Italiannies. The Malaysian-based food and beverage group was listed on Catalist, the secondary board of the Singapore Exchange, in 2012.   

Reddy says 2015 is going to be an important year for the group, with its earnings likely to snap a two-year losing streak.

He points out that impairments and other provisions have adversely impacted earnings, resulting in the company suffering consistent losses since its reverse takeover of Asia Silk Holdings Pte Ltd in 2012.

“If you look at our Ebitda (earnings before interest, taxes, depreciation, and amortisation) in 2013, it was almost RM11 million, but as a growing brand we have had impairments and that sort of thing. We see all that fading away by 2015,” he says.

For the six months ended June 2014, Chaswood registered a net profit of RM3.2 million on revenue of RM79.5 million.   

Possible earnings boosters include its foray into China.  

China looms

In December last year, Chaswood paid RM12.9 million to buy Yi Jun Restaurant Management (Shanghai) Co Ltd and Beijing TGI Friday's Restaurant Co Ltd from US-based TGI Friday’s Inc. The two Chinese companies own six TGIF restaurants in Beijing and Shanghai, and provide management services to an outlet in Tianjin.

The RM12.9 million investment was funded by internally generated funds and bank borrowings.

The six restaurants, which are up and running, are one aspect of the acquisition, but there’s more to it. Chaswood also has a development agreement to build and operate up to 17 new TGIF restaurants over five years in Beijing, Shanghai, and other cities. The company has also been given rights to develop four restaurants in Shenzen — two more than it had originally been granted.

“They (TGIF US) have done a lot of groundwork, a lot of research and investment, and they spent a lot of money to position the brand … we are buying software and systems, not just restaurants. So, the price tag is cheap if you ask me. We are getting a lot for the RM12.9 million,” Reddy says.

Chaswood is looking to open two more TGIF outlets in Shanghai this year. Reddy says it will cost between RM2.3 million and RM2.9 million to set up each outlet, depending on the location and size.

“China may have slowed down but it is still growing,” he says.

He notes that competition in China is limited. Hooters and Hard Rock Café usually have only one outlet in each city, while other brands are not international names.

To put things into perspective, in Kuala Lumpur and Selangor alone, there are 13 TGIF outlets.

“In China, there have been years of gradual change towards Western lifestyle, habits, clothing, everything  … but there is no international chain there for casual dining, so the home-grown [American diner] brands are doing extremely well,” Reddy says.

Eventually, Chaswood will bring its other restaurants to China as well, which could be a boon for the company as it owns brands such as Italiannies.

On the home front

Simultaneously, while it is expanding in China, Chaswood is looking to open three to four new restaurants in Malaysia, which could entail as much as RM8 million in capital expenditure.

As at end-June last year, the company had a cash pile of RM11.3 million, total liabilities of RM61.3 million and shareholders’ funds of RM44.6 million.

The gestation period for restaurants, Reddy says, is between 18 and 24 months, but it could be sooner depending on a whole host of factors.

While Malaysia currently accounts for a chunk of the revenue, Reddy says by 2018, revenue from abroad would account for as much as 40% of sales.

However, it has no plans to venture into new markets or get more brands.

“We actually have too much on our plate. China is huge, then there’s Indonesia with a population of 250 million, many cities, so we have enough on our plate to keep us busy for the next five years,” he says.

While the margins of the restaurant business have more or less been maintained, Reddy says the increasing cost of real estate is nibbling at it.  “Our competition has not grown that much, but the number of malls has,” he says.

As for the general perception that American diners may be fading in terms of appeal, Reddy says demand is still strong.

“There is basically cannibalisation. In any service industry — food and beverage and retail industry — the challenges are there, there’s a continuous flow of competitors coming in. It’s how we remain relevant, stay focused and meet the expectations of our guests,” says Reddy,  who has close to 23% of Chaswood.

On the issue of whether Chaswood’s largest shareholder, Posh Corridor Sdn Bhd, which has a 62% stake, would sell out anytime soon, he replies, “I don’t know. I can’t represent the shareholder and tell you their plans. I’m not privy to their plans.”

Posh Corridor is linked to Asiasons Capital Ltd, which came under the spotlight when its shares and those of related companies Blumont Group Ltd and LionGold Corp came under fire after major share price movements. Some individuals  were charged with trading irregularities by the Monetary Authority of Singapore, and more than S$10 billion was erased from the market value of these companies in October 2013. Asiasons had acquired 75% of Chaswood at end-April 2010 for RM37.5 million.

Chaswood’s stock closed at 14.9 cents in Singapore, giving it a market capitalisation of slightly more than S$33.8  million.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on March 2 - 8, 2015.

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