Kimly (KMLY SP) - UOB Kay Hian 2017-12-07: Operationally Resilient; Maintain BUY On Share Price Pullback

Kimly (KMLY SP) - UOB Kay Hian 2017-12-07: Operationally Resilient; Maintain BUY On Share Price Pullback KIMLY LIMITED 1D0.SI

Kimly (KMLY SP) - Operationally Resilient; Maintain BUY On Share Price Pullback

  • Since its IPO in March, Kimly's share price has retreated nearly 30% from ytd peak. The stock is now trading at an 11% discount to consumer peers’ FY18F PE. 
  • With a strong cash balance of S$83.7m (20% of market cap), potential M&As could be a compelling catalyst for earnings growth for FY18-19. Kimly remains operationally resilient, and we expect continued organic expansion through the opening of new outlets.
  • Maintain BUY with a lower DCF-based target price of S$0.45 (previously S$0.46).



WHAT’S NEW


Maintain BUY on resilient earnings, solid cash flows and reasonable valuations.

  • Since its listing in Mar 17, Kimly's share price has pulled back nearly 30% from its ytd peak. The stock is now trading at 18x FY18F PE (13.8x ex-cash PE), a 13.5% discount to consumer peers’ despite strong FY18F free cash flow yield of 5.8% (peers: 4.7%). 
  • With a 27% upside to our DCF target price of S$0.45, strong cash flow as well as intact fundamentals, maintain BUY.


STOCK IMPACT


Strong cash position and clean balance sheet. 

  • We continue to like Kimly for its strong cash generation capabilities, clean balance sheet as well as earnings resilience. 
  • Kimly recorded a strong cash balance of S$83.7m (S$0.07/share) in FY17 vs S$29.4m in FY16 (S$0.03/share).

Potential M&As to drive next stage of growth. 

  • While we note that near-term growth may be relatively muted, its strong war chest of S$83.7m provides opportunities for the group to grow its business vertically or horizontally through acquisitions, which will likely drive FY18-19 earnings. 
  • Possible areas of growth could either be in the coffee-shop trade or related businesses such as F&B.


Operationally resilient with steady organic growth. 

  • In FY17, revenue grew 11.6% yoy, driven by continued network expansion in food stalls and coffee shop outlets. As an indication, the group added seven food outlets from a year ago, and the average occupancy remains high at 96-98%. 
  • Going forward, we expect the group to continue to expand organically through more new outlets.


Riding food delivery wave. 

  • Against a backdrop of digital disruption and changing lifestyles, we are seeing growing popularity of online food delivery players. We view this trend positively as delivery services can give Kimly an additional avenue to sell its products and target consumers who otherwise would not be frequent patrons of the outlets. 
  • Kimly has already started to partner Ubereats, Deliveroo and Foodpanda for its dim sum and zichar businesses, which we understand revenue from delivery alone could contribute around S$60,000/month.

Central kitchen expansion to drive cost efficiency. 

  • The expansion of the central kitchen remains on track. Construction has completed and the final phase of upgrading work has commenced and is expected to complete by 2018. 
  • Currently, the group is also sourcing for new equipment and development software to increase operational efficiency of its central kitchen. 
  • We view the expansion and development of the central kitchen positively as Kimly would be able to increase efficiency through performing more processes and reducing manpower reliance. By increasing production output, the group can also realise cost synergies through bulk purchases and heighten quality control.


EARNINGS REVISION/RISK

  • We introduce FY20 earnings and trim FY18-19 earnings forecasts by 2% as we fine-tune our cost assumptions to account for higher staff expenses. 
  • Based on our new estimates, we project a 3-year (FY18-20) EPS CAGR of 6.3%.


VALUATION/RECOMMENDATION

  • Maintain BUY with a lower DCF-based target price of S$0.45 (previously S$0.46).
  • Our target price is based on explicit FY18-20 free cash flow forecast, terminal growth of 0.5% and WACC of 6.3% reflecting cost of equity. 
  • Our target price implies 22.8x FY18F PE and 18.6x ex cash PE.




Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-12-07
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.450 Down 0.460



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