Kimly - RHB Invest 2018-06-27: 2018H2 Small Mid Cap Top Pick #3 ~ Organic Growth And M&A Are Catalysts

KIMLY LIMITED SGX: 1D0

Kimly - 2018H2 Small-Mid Cap Top Pick 3 ~ Organic Growth And M&A Are Catalysts

Maintain BUY and DCF-based SGD0.43 Target Price, 19% upside.
Kimly reported a superb 2Q18, with revenue growing 3.8% y-o-y and PATMI surging 20.2% y-o-y. This was on increased number of coffee shops and third-party brands outlets, and 10.2% decrease in administrative costs from the absence of listing expenses.
We expect it to continue into subsequent quarters. Management has also opened a new coffee shop in Ghim Moh and added another four food stores to Kimly’s network.

Kimly reported a superb 2Q18, with revenue steadily growing at 3.8% y-o-y and PATMI surging 20.2% y-o-y. This was from an increased number of coffee shops and third-party brands outlets, and 10.2% decrease in administrative costs from the absence of listing expenses.

As at 2Q18, Kimly’s net cash position was SGD85.5m, with zero debt. As a result, management declared an interim dividend of SGD0.0028, representing a payout ratio of 28.9%.
We expect the final dividend to be significantly higher, at around 50% payout ratio of PATMI.

With net cash balance of SGD85.5m, and consistent and recurring positive cash flow, management is interested to look into acquisition targets for vertical integration.
It may look for value-accretive acquisitions or JVs of SGD10-20m to boost value chain proposition in 2018- 2019. This is likely to add around 10-15% of PATMI to FY18F, which we have not included in our estimates.

Today, the group operates and manages 68 coffee shops and four industrial canteens under the Kimly and third-party brands. It also operates four food courts under the foodclique brand.
As at 30 Sep 2017, Kimly enjoyed a 98% occupancy rate across nearly 500 stalls within managed food outlets. Management is looking to add up to 1-2 coffee shops annually, and ramp up on third-party brands – which it has been doing.
We are expecting at least 3-4 more additions to its portfolio in FY18.

We like the defensive and rich cash flow-generative nature of Kimly’s business. We also think that the new outlets it invested in during 2017 – and those coming up in 2018 – are likely to be profitable in 2019-2020.
In addition, with M&A in the pipeline, we believe growth would be exciting in the coming years. Kimly is also trading below peer average P/E of 24x.
Key risks are rises in rental rates and labour shortages.
RHB is the only broker covering Kimly.

Also Read:

Small Mid Caps Stocks Singapore - RHB Invest 2018-06-27: Top Picks For 2H18

Jarick Seet RHB Invest | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2018-06-27

SGX Stock Analyst Report BUY Maintain BUY 0.430 Same 0.430