Kimly, Koufu stay easy on the pockets and taste buds of Singaporeans

Given the shift away from discretionary spending and change in consumption patterns, analysts have turned positive on local food court and coffee shop operators Koufu Group and Kimly which offer affordable and convenient meals in a casual setting.

Takeaway, please

Kimly’s management, via written comments, tells The Edge Singapore that it is fortunate that its coffee shops are mostly located in HDB heartlands. “Many people are working from home due to the pandemic, as a result footfalls to our coffee shops have increased.”

For the recent 1HFY2020 ended March, Kimly reported earnings of $10.5 million, up 5.3% from a year ago. This came on the back of a 3.1% increase in revenue to $107.4 million. However, the results do not include the full extent of revenue contribution during the circuit breaker period which lasted from April 7 to June 1.

According to Kimly, sales of beverages like kopi and soft drinks suffered during the circuit breaker period as not many people order them for takeaway. However, the fall was offset by higher sales from its food retail division, which includes sales from stalls selling “economical” rice with an assortment of common dishes, seafood zichar or stir-fry as well as dianxin stalls.

“We monitor our revenue by divisions very closely. We noticed that the work from home directive created demand for our offerings. Revenue from the online food delivery also increased during this period. Meanwhile, grants provided by the government such as the Jobs Support Scheme and Foreign Workers’ levy waiver and rebates also helped us pull through one of the bleakest periods we have ever witnessed in our industry,” says Kimly.

In its latest report, RHB Group Research upgraded Kimly to “buy” from “neutral” with a higher target price of 26 cents from 24 cents previously. “We think that most of the bad news for Kimly has already been priced in, and valuation at this level seems attractive, being a cash-generative and defensive business,” notes analyst Jarick Seet.

“We expect Kimly’s business to remain durable amid this pandemic, and it will likely continue to reward shareholders with attractive dividends, despite the yield falling slightly for FY2020 ended September to 4.7%. We expect dividends to pick up over the next few years as things return to normal for the company post circuit breaker,” adds Seet.

At present, with safe management measures in place during the phased reopening, the outlook for Kimly is looking even better. “We are confident coffee shops will always remain an integral part of Singapore’s food culture. We have noticed rising footfalls with the easing of circuit breaker measures and with dining-in at F&B establishments allowed,” it says.

Kimly is also trying to move on from a botched acquisition attempt. Back in July 2018, it had announced the purchase of beverage-manufacturing business Asian Story Corporation for $16 million. However, the deal soon came under regulatory scrutiny and was eventually aborted when the Commercial Affairs Department stepped in. While Alain Ong, a former Kimly non-executive director linked to the proposed acquisition, had privately settled a lawsuit with his former employer Pokka Corporation (Singapore), there have been no new updates on the case so far.

Since that incident, Kimly has focused on the acquisition of coffee shops and properties for new outlets instead. For now, the group has no plans to diversify its business significantly as it is not done enlarging market share within its current business segments. It also plans to incorporate technology and digitalisation in its outlets to improve operations. “We will continue to keep our options open, and will assess each venture for its potential and scalability when an opportunity arises,” adds Kimly.

Courting with aircon, clean environs

Similar to coffee shops, food courts are also an established part of Singapore’s food culture. A must-have in shopping malls, offices, tourist attractions and even hospitals and higher institutes of learning, they fill a growing niche, selling local favourites at a slightly higher price point compared to coffee shops, in exchange for better dining comfort.

Although local food court operator Koufu reported an 82% fall in earnings to $2.5 million in 1HFY2020 ended June from a year ago to $2.5 million as revenue fell 23.2%, it remains positive on its recovery and outlook. For July and August, the company says it has seen a “significant improvement” in its revenue relative to 2QFY2020 when the circuit breaker period was in operation, although it has not quite recovered to pre-Covid levels yet.

“We believe our strong brand equity, proven and cash-generative business model and clear growth strategies make us an attractive value proposition to investors,” says executive chairman and CEO Pang Lim of Koufu in an email interview with The Edge Singapore.

Similar to coffee shops, Koufu’s food courts in public housing estates did rather well during the circuit breaker period. That helped to mitigate some of the negative impact from the outlets located in the central areas. Footfalls and revenue in the heartlands have improved some 50% to 60% after the resumption of dine-in services.

However, Pang reveals that some outlets, including those near offices, in downtown shopping malls and educational institutions, had to be temporarily closed during the circuit breaker.

Although these outlets have since reopened, analysts note that these outlets will take longer to recover with international travel restrictions, working from home and safe management measures still in place.

“For these outlets, we are actively participating in the promotional activities with the mall developers to boost traffic. We have also been actively listing our products on third-party online shopping platforms like Shopback and Lazada as this opens another channel for sales distribution,” says Pang.

UOB Kay Hian’s Joohijit Kaur, who has a “buy” call and 78 cents target price, expects Koufu to report significant q-o-q earnings improvement in the second half of the year. Besides recovery in revenue, additional government grants will also help.

Phillip Securities’ Terence Chua, who has a similar target price of 78 cents, calls Koufu “best in class” with a defensive business model especially during an economic slowdown. “We also like Koufu’s superior growth profile given their overseas expansion and see their impending move into the new integrated facility as a major catalyst for the group,” he adds.

For DBS Group Research’s Alfie Yeo, Koufu is his top Singapore F&B Food service pick. He has a “buy” on the stock with a 75 cents target price. “Growth is supported by gradual re-opening of its food outlets on easing circuit breaker measures, supported by the acquisition of Deli Asia for $22 million which will contribute substantially to net profit in FY2021,” says Yeo. To recap, Koufu on July 1 acquired Deli Asia, a leading supplier of fried food and dough products with more than 50 outlets across the island.

Pang says the acquisition will help Koufu accelerate the diversification of income streams through expansion of retail brands and business networks, both locally and abroad, and broaden its existing range of dianxin snacks, fried food and dough products sold in Koufu outlets. “This acquisition allows us to reap both upstream and downstream synergies and economies of scale,” he says.

Koufu is also betting on economies of scale and better productivity when its new integrated facility is completed in 3Q2020. Located at Woodlands Ave 12, the $40-million development will consolidate manufacturing capacity for its foodstuff, central kitchens for the outlets, and also the so-called “cloud kitchens” which is touted to be the next growth chapter of food delivery.

And even as Koufu expands its range of offerings, Pang prefers not to diversify into higher-end full-service restaurants. “Our core business is still serving the mass market which is where the demand is, even in times of pandemic,” he says.