KIMLY LTD (KMLY SP) - UOB Kay Hian 2017-08-08: 9MFY17 Earnings In Line, Upgrade To Buy On Share Price Pullback


KIMLY LTD (KMLY SP) - UOB Kay Hian 2017-08-08: 9MFY17 Earnings In Line, Upgrade To Buy On Share Price Pullback KIMLY LIMITED 1D0.SI

KIMLY LTD (KMLY SP) - 9MFY17 Earnings In Line, Upgrade To Buy On Share Price Pullback

  • Kimly reported a 9MFY17 adjusted earnings decline of 14% yoy as revenue growth was exceeded by higher operating expenses and effective tax rate.
  • However, since our HOLD initiation in May, the stock has retreated 15%, where Kimly is now trading at a 9% discount to peers’ FY17F PE. 
  • With a warchest of S$77m in cash balance, we see potential M&As as a compelling catalyst for earnings growth in FY18-19. 
  • Upgrade To BUY with DCF target price of S$0.46 on valuation grounds (previously S$0.48).



VALUATION

  • We upgrade Kimly from HOLD to BUY on valuation grounds as its stock price has pulled back 15% since our HOLD initiation in May 17. (See report: KIMLY LTD  - A Cash-Rich Business Awaiting The Next Growth Driver)
  • At current levels, the stock is now trading at FY17F PE of 19.7x, a 9% discount to peers. 
  • Meanwhile, FY17F ex cash PE is trading at 16.2x. With a 24% upside to our DCF target price of S$0.46 (previously S$0.48), we upgrade to BUY.

Strong cash position and clean balance sheet. 

  • We like Kimly for its strong cash generation capabilities, clean balance sheet as well as earnings resilience. As at 30 June 17, the group had a strong cash balance of S$76.6m (30 Jun 16: S$37.1m).

Potential M&As may drive the next stage of growth. 

  • While we note that near-term growth may be relatively muted, its strong warchest of S$76.6m provides opportunities for the group to grow its business vertically or horizontally through potential acquisitions, which will likely drive FY18-19 earnings.


INVESTMENT HIGHLIGHTS


9MFY17 adjusted earnings in line with estimates. 

  • 9MFY17 adjusted earnings are in line with expectation, coming in at 72% of our FY17 estimates. 9MFY17 earnings of S$16.5m declined 14% yoy on an adjusted basis due to higher operating expenses from expansion as well as tax impact.

Revenue boosted by expanding network but takes time to ramp up. 

  • 9MFY17 revenue grew 12.4% yoy, driven by continued expansion of network in the food retail stalls and coffee shop outlets. 
  • Compared with a year ago, the group has added a total of three new coffee shops as well as 13 food retail stalls. However, we understand that it typically takes 6-9 months for a coffee shop to ramp up and thus, there is likely to be more traction in FY18.

Higher staff costs and effective tax rate dragged earnings. 

  • 9MFY17 costs of sales increased by 14.4% yoy, mainly due to higher staff costs as well as an increase in operating lease expense. 
  • Due to the effects of the restructuring post-IPO, effective tax rate increased to 12.8% for 9MFY17, compared with 5.3% in the previous year.

Reduce FY17-19F earnings slightly by 3.7% to factor in higher cost of sales.

  • Based on the new estimates, we will derive a 3-year FY17-19 CAGR of 1%.




Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-08
UOB Kay Hian SGX Stock Analyst Report BUY Upgrade HOLD 0.460 Down 0.480



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