Taste Gourmet: Executing Well in a Tough Environment

In my earlier insight, Taste Gourmet - Small Is Beautiful I had written about the company's ability to execute extremely well and how it will provide an opportunity to investors as a growth as well as a dividend-paying stock. Post the HK protests ( which intensified in October and November 2019 ) and now recently coronavirus issue, which will affect it's Q4 2020 results, I decided to provide an extensive update with my earnings forecasts for the company. In this difficult environment over the last 6 months, Taste Gourmet Group Ltd (8371 HK) has executed quite well and is on its way to achieving at least 20+% profit growth in FY20.

I forecast that the company is on track to delivering 33 mn HKD in profits at least for FY20 representing a 23% profit growth YoY. I will provide my rationale for why I think this is possible. For now, cheap valuations and good execution are the bedrock of the thesis in investing in this name. With a market capitalization of 280 mn HKD, the stock trades at a PE of 8.5x FY20 and 4.5x FY21. With net cash of 74 mn HKD on the balance sheet, the ex-cash PE's are even more enticing at 6.2x FY20 and3.2x FY21. Assuming they payout 55% of earnings as a dividend, ( which they have historically so far ) the stock trades at a dividend yield of approximately 6% on FY20e.

Risks

1. There is the short term risk that the coronavirus outbreak takes a slightly longer time to resolve affecting Q1 2021 earnings.
2. HK retail is weak for a prolonged period and discretionary spending power is impacted.