Silver Chef is an Australian company with a straightforward business model.
start-ups – new restaurants – are often starved for cash. They need to invest
in professional cooking equipment but purchasing it outright is risky and ties
up more working capital than they can spare. The typical piece of equipment costs
$10,000. Silver Chef offers them a lease-try-buy option. They commit to leasing,
for example, a Middleby convection oven and Silver Chef then buys it and rents
it to them. The minimum lease term is one year, and they pay rent monthly, in
advance. Banks require Director guarantees, Silver Chef
doesn’t. If they can’t pay, the oven is repossessed.
If their business succeeds, they have the
option to buy that piece of equipment and are credited for some of the rental
fees they’ve paid. Some do buy but most don’t – they continue to lease because
the rent is off-balance sheet.
One can see how it’s a win-win for both parties. Besides, banks
concentrate on large businesses, Silver Chef concentrates on small enterprises.
Silver Chef succeeds in making this model work. No one customer constitutes more than 1% of revenue, thereby limiting risk. It grows fast
and grows profitably.
It has the bright idea that the best customers may be
franchisees of well-known, fast-growing brands, and it now targets the franchisees
of Dominos Pizza, Subway, The Coffee Club, Nandos, Outback
Jack’s Bar & Grill, Gloria Jean’s, and Wendys (an ice cream
franchise, not the hamburger chain). These customers subsequently make up a substantial share of
its business, are lower risk, and present excellent growth opportunities.
Better, once embedded in these brands, word of mouth makes it likely that there would be some protection from price competition waged by potential entrants into the equipment leasing space.
The next bight idea: since this model works well in hospitality, why not extend it
to other sectors? Silver Chef establishes GoGetta in 2008 and does very well
indeed. Earth movers, gym equipment, cash registers, hydraulic pipe benders,
trailers, you name it. Same value proposition, same sized businesses, different
Anyway, here are the financials:
(NB: Silver Chef's been in business since 1986, went public in 2005, and I don't have access to 2004 balance sheet information).
The above somewhat understates the profitability of Silver Chef's business. The cash recovery rate captures it better:
As an aside, I am convinced that, when Buffett looks at a stock, its CRR is what he calculates first, because it is so quick and so reliable. Consider, for example, this discussion of his investment in Mid-Contental Tab Card Co.
In any case, Silver Chef is in the business of turning purchased assets into cash and one can see from the table above is that it does that quite well and it's getting better at it as it grows.
So, that's where we are: Silver Chef is a simple easy-to-understand business, with a CAGR of 45% over the last eight years, earning its cost of capital, with an as yet 3% penetration of its potential market. It is selling in the market at a yield of 11.65%.
It's no growth value, at an 8.5% cost of capital, is close to AUD$5.15. If you ask a Buffett-like question -- "Will I earn 15% on $170m of sales?" -- the answer is much more likely to be "yes" than it is to be "no".
I'd venture that Silver Chef's minimum true value is in the neighborhood of AUD$12.
Disclosure: No position.