Kimly - RHB Invest 2018-07-03: Moving Into Beverages

KIMLY LIMITED SGX: 1D0

Kimly - Moving Into Beverages

Maintain BUY, with a new SGD0.46 Target Price from SGD0.43, 24% upside.
Kimly has acquired Asian Story Corp (ASC) for SGD16m. The latter is involved in the domestic manufacturing & distribution of a variety of beverages. This includes the Asian Story line, which has a 7.7% local market share. If we assume a PBT of SGD2m for FY18, this acquisition will be completed at ~14-15x P/E, fairly reasonable for a high-growth beverage firm.
It also complements Kimly’s business model and provides an overseas expansion angle to the mix. With accretion from the acquisition, we raise our DCF-backed Target Price.
Note that Kimly is one of our Singapore mid-cap top picks, and we are one of only two brokers covering this counter.

Asian Story Corp (ASC)’s Asian Story brand portfolio comprises nine different drinks. This brand has a 7.7% market share and is ranked 3rd largest in the domestic Asian drinks market. We understand that it will also be distributing Pepsi and coconut water in the near term.
With more beverages in its arsenal, especially Pepsi, this could further boost ASC’s profitability. In addition, Kimly could actually replace its current canned drink choices with the beverages ASC distributes, which is likely to further boost the latter’s bottomline. This is in turn should benefit Kimly, as it owns 100% of ASC.

This brand is currently distributed by Pokka Corp in Singapore, Malaysia and Brunei, and is in the midst of working with a foreign partner to distribute the beverages in Thailand.
In addition, there are also plans to join a few trade shows in Europe, as Kimly has noticed the increasing demand for Asian beverages there. This is due to the growing number of Asians residing in this region.

With the first three months of PBT already reaching SGD0.55m despite a PBT of just SGD1.15m in FY17, the growth signs are very encouraging.
We understand the introduction of Pepsi, as well as its new bandung drink into the mix, has boosted profitability. With more beverage types like coconut water – coupled with the replacement of drinks at Kimly’s drink stores and coffeeshops, as well as the overseas expansion plans – we foresee that a FY18 PBT of SGD2m is achievable.
We also expect a FY19 PBT of ~SGD3m due to the aforementioned factors.

Despite the amortisation of intangibles for this acquisition likely increasing by SGD2m/year for the first 30 months, the longer-term growth, profit accretion and cash flow to Kimly will be quite positive, in our view. As a result, even after adjusting for a maximum earn-out – which includes SGD3m worth of new shares being issued at SGD0.40 each – our DCF-backed Target Price has been raised.
With SGD50-60m in cash remaining, we think there will likely be more similar style acquisitions to come, which should further propel Kimly’s profitability.
Key risks to our call include a rise in rental rates and labour shortages.

Jarick Seet RHB Invest | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2018-07-03

SGX Stock Analyst Report BUY Maintain BUY 0.46 Up 0.430