KIMLY LTD (KMLY SP) - UOB Kay Hian 2017-05-17: A Cash-Rich Business Awaiting The Next Growth Driver

KIMLY LTD (KMLY SP) - UOB Kay Hian 2017-05-17: A Cash-Rich Business Awaiting The Next Growth Driver KIMLY LIMITED 1D0.SI

KIMLY LTD (KMLY SP) - A Cash-Rich Business Awaiting The Next Growth Driver

  • We initiate coverage on Kimly with a HOLD and DCF-based target price of S$0.48.
  • While we like the group for its strong cash generation capabilities and clean balance sheet, we believe most of the positives have been priced in.
  • Nevertheless, we remain optimistic of the group’s business outlook which is bolstered by a strong management team and resilient industry trends.
  • Meanwhile, we believe potential M&As could add another leg of growth for Kimly.
  • As the only listed coffee shop operator with the largest market share, the group is in an advantageous position to consolidate the industry. Entry price: S$0.40.



Initiate coverage with HOLD and DCF-based target price of S$0.48. 

  • We initiate coverage on Kimly with a HOLD and DCF-based target price of S$0.48. 
  • We like Kimly for its high cash generation capabilities, clean balance sheet and earnings resilience.
  • Indicatively, Kimly is offering an above average FY17F/18F FCF Yield of 4.4%/6.3% as compared with peers’ FY17F/FY18F FCF yield of 4.1%/4.9%. 
  • However, at current levels, we believe most of the positives have been priced in and we would be buyers closer to S$0.40.


Potential acquisitions may move the needle. 

  • We note the coffee shop trade is highly fragmented, where the largest four players (including Kimly) constitute only c.13% of market share. Kimly’s existing clout of 6% market share puts the company in an advantageous position to consolidate the industry. 
  • Moreover, as the only listed coffee shop operator in Singapore, we reckon this gives Kimly leverage in terms of a strong war chest as well as acquisition currency in the form of equity. Following which, we may see potential re-rating for the stock.



Incremental tax could impact FY17 earnings but stable growth from FY18. 

  • For FY17, we expect earnings to decline 7% yoy on the back of higher effective tax rates of 13% (historically 4-5%) upon restructuring. We believe the negative impact will be partially offset by the price increases at the food retail stalls. 
  • Overall, we project a threeyear net profit (FY17-19) CAGR of 1.7%, supported by steady expansion of the number of outlets managed (about 5 outlets p.a.) and food retail stalls (about 10-15 p.a.)


Clean balance sheet… 

  • As of FY16, the group was in a net cash position. The group has a history of strong operating cash flow and we expect operating cash flows to remain resilient at S$28.1m and S$29.0m by FY17 and FY18 respectively.


…supported by a massive cash cow. 

  • Kimly’s beverage business (64 stalls) is highly cash generative, providing daily cash flow and ensuring the viability of the entire food outlet. Furthermore, sales can also help mitigate potential loss of income from vacant stalls. We project beverage stalls to constitute 40-44% of total group revenue, in line with historical numbers.


Geographically blessed. 

  • As a coffee shop operator, one of Kimly’s key success factors is location. Its food outlets are strategically located across the heartlands of Singapore, where the group was able to attract a diversified customer base given the variety of products at the stalls and a commendable occupancy rate of 98%.
  • Furthermore, with the Jurong Lake District earmarked as the second central business district of Singapore by the government, Kimly is well-positioned to ride on the growth prospects in that region with 10 outlets in the Jurong area.




Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-17
UOB Kay Hian SGX Stock Analyst Report HOLD Initiate HOLD 0.48 Same 0.48



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