Koufu Group Ltd - DBS Research 2018-08-27: Mouthful Of Fortune

Koufu Group Ltd - DBS Group Research 2018-08-27: Mouthful Of Fortune KOUFU GROUP LIMITED SGX:VL6

Koufu Group Ltd - Mouthful Of Fortune

  • Leading foodcourt and coffee shop operator with 48 foodcourts in Singapore and one in Macau.
  • Strong cashflow generative business of over S$30m a year with dividend payout at 50% earnings in FY18-19F.
  • New integrated facility to drive long term growth.
  • Initiating coverage with BUY with Target Price of S$0.84.

Initiate with BUY, Target Price S$0.84.

  • We initiate coverage on Koufu with a BUY recommendation and Target Price of S$0.84. 
  • Koufu is one of the largest foodcourt and coffee shop operators in Singapore with 48 foodcourt outlets and 14 coffee shops. It also has one foodcourt in Macau.
  • We like the stock for its strong cashflow generation capability, defensive earnings, and net cash balance sheet. Koufu’s return on average equity (ROAE) is one of the strongest among peers, at 25.4% for FY19F. Dividend yield is decent at 3.8% on a payout of 50% of earnings. 
  • We expect growth to be largely stable going forward, with revenue growth offset by higher costs. We see higher revenue led by new foodcourts in Singapore and Macau, with higher operating costs and depreciation partially offsetting the increase in revenue. 
  • Longer term drivers include the setting up of an integrated facility aimed at delivering economies of scale, and overseas growth in Macau. 
  • Stock catalyst will stem from realisation of economies of scale over the long term and special dividends from sale of existing central kitchen property before moving into the new integrated facility.

Key Risks to Our View: 

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  • Key earnings risks include failure to renew leases, inability to secure new outlets, departure of key tenants and food stalls, customers downtrading to hawker centres and coffee shops, competition from foodcourts that offer more attractive propositions (environment, pricing, food quality etc.) to customers. 

Executive Summary

Initiating coverage with BUY, TP: S$0.84; stock trades at 13.2x FY19F PE.

  • We initiate coverage on Koufu with a BUY rating and a Target Price of S$0.84, pegged at 17x FY19F earnings. 
  • We believe there is value for investors as the stock is currently trading at a PE valuation of 13.2x on FY19F EPS, significantly lower than the peer average of 17x PE, and the dividend yield is decent at 3.8%.

Leading foodcourt and coffee shop operator.

  • Koufu Group is one of the largest foodcourt and coffee shop operators in Singapore with 48 foodcourt outlets and 14 coffee shops in Singapore based on current store count. 
  • Koufu Group was first founded by Mr Pang Lim and Madam Ng Hoon Tien in 2002 and has grown from just two foodcourts and one coffee shop.

Food services industry is expanding.

  • According to Euromonitor, Singapore’s foodservice industry is projected to grow at 2.3% CAGR over the next five years (2017 – 2022F). Growth will be driven by higher ticket sizes and higher number of foodservice transactions. 
  • The number of foodservice outlets is expected to grow as well, albeit at a slower pace.

Greater presence with new F&B outlets in Singapore and overseas.

  • Koufu will open more new outlets in Singapore at strategic locations with a focus on hospitals, commercial malls, educational institutions, and new housing estates. It continues to negotiate with landlords and developers for new F&B outlets in Macau, after opening its first foodcourt and Supertea F&B kiosk at Sands Cotai Central in Macau. 
  • Longer term growth will be in markets outside of Singapore and Macau, including PRC, Malaysia and Indonesia.

Building an integrated facility with a larger central kitchen to support future growth.

  • There are plans to establish an integrated facility five times larger than its current facilities, to expand centralised procurement, preparation and processing capabilities of the existing central kitchens. 
  • Benefits include better operational efficiencies, productivity enhancements and economies of scale, and better consistency with food quality. There are also opportunities to insource dishwashing function at the new integrated facility.

Experienced management team with proven track record.

  • Koufu Group is led by its founding shareholder, Mr Pang Lim, who has more than 27 years of experience in the F&B and food service management industry and is responsible for the overall management and operations. He is assisted by Executive Director and co-founding shareholder, Madam Ng Hoon Tien, who has more than 15 years of experience in the F&B and food service management industry, and is responsible for the oversight of the operations of Koufu. They built Koufu from scratch into a company with S$26.9m earnings in FY17.

Growing through joint ventures and partnerships.

  • Going forward, Koufu will identify partners for joint venture or strategic alliances in the F&B retail business segment to leverage on its expansion strategy. 
  • Expansion through partners will include taking stakes in downstream stallholders to secure stickiness that will fill occupancy in new foodcourts, and an upstream bakery supplier to support the central bakery kitchen at the new integrated facility for more vertical integration.

Strong operating model.

  • Koufu is an established foodcourt and coffee shop operator and manager in Singapore with multiple brands. It has complementary business segments with diversified revenue streams from outlet & mall management business and F&B retail business. 
  • Koufu has quality stall operators and manages them actively to ensure high occupancy. Its central kitchens and strong supply chain facilitate cost management and operational efficiency. Koufu also uses technology to improve productivity.

Cashflow generative business, strong ROE.

  • Operations are highly cashflow generative with operating cashflows of c.S$33m to c.S$51m from FY15-17. We expect Koufu to remain in a strong net cash position in FY18F to FY20F given its cash generative business. 
  • Operating cash flow is projected to remain in the region of c.S$40-46m in FY18-20F, after adjusting for impact of accounting changes of FRS116 from FY19F onwards. 
  • Koufu’s ROAE is one of the strongest among peers, at 25.5% for FY19F.

Earnings expected to be relatively flat.

  • We anticipate relatively flat earnings growth over the next two years. In FY18F, revenue growth, driven by new outlets, will be offset by a loss of c.S$1.3m interest arising from the convertible loan notes novated to Jun Yuan Holdings, one-off IPO expenses of S$1.3m, and higher rents, staff costs, and depreciation due to more new stores. 
  • In FY19F, core earnings are expected to remain relatively flat as well, due to net additional finance cost from the assumed adoption of FRS116. FRS116 generally capitalises leases and rentals, instead of accounting for them operating expenses.

Company Background

Founded in 2002, grown into an organisation comprising 48 foodcourts and 14 coffee shops.

  • Koufu is an established operator and manager of F&B establishments in Singapore with a history dating back to 2002. It was founded by Mr Pang Lim, Executive Chairman and Chief Executive Officer, together with Mdm Ng Hoon Tien, Executive Director. 
  • Koufu first commenced operations with two foodcourts and one coffee shop.

Led by founders and supported by experienced professionals.

  • Mr Pang Lim and Mdm Ng continue to play an instrumental role in driving Koufu Group’s expansion as an operator and manager of neighbourhood large-scale modern foodcourts and coffee shops in both residential areas and commercial malls in Singapore.
  • From 2002 to 2017, Koufu Group embarked on an expansion phase and has since grown to an organisation comprising 48 foodcourts and 14 coffee shops in Singapore and one foodcourt in Macau. It also manages one hawker centre and one commercial mall in Singapore.

FY17 – Group revenue of S$216.7m.

  • For the year ended 2017, Koufu Group achieved a net profit of S$26.9m on the back of S$216.7m in revenue. Its 3-year net profit CAGR (FY15 to FY17) was 14%, driven by 4% CAGR growth in revenue and 2 ppt net margin expansion.
  • Koufu Group uses modern management philosophy while retaining the traditional coffee shop culture, with emphasis on providing value for money dining options in a comfortable environment.
  • Koufu has self-operated F&B stalls located within foodcourts and coffee shops or within third party foodcourts under the F&B retail business, which operates 82 F&B stalls, five F&B kiosks, 11 QSRs and three full-service restaurants in Singapore, and two F&B stalls and one F&B kiosk in Macau.

Two main business segments.

  • Koufu Group’s business can be largely split into two main segments, namely Outlet and mall management, and F&B Retail business.

(A) Outlet and mall management

Foodcourts, coffee shops, hawker centres and malls.

  • Outlet and mall management segment operates and/or manages foodcourts, coffee shops, hawker centres and malls. Based on the latest store count, there are currently 48 foodcourts, 14 coffee shops, 1 hawker centre and 1 commercial mall under management in Singapore. 
  • All foodcourts and coffee shops, except for 2 foodcourts and one coffee shop which are operated on behalf of third party owners, are managed and operated by Koufu. The above outlets are located in Singapore excluding one foodcourt in Macau.

FoodCourts and Coffee Shops.

  • Koufu manages and operates 48 foodcourts in Singapore and one in Macau. Foodcourts and coffee shops are typically located across Singapore’s residential areas, commercial malls, office buildings and tertiary educational institutions, heartlands and city areas, with two foodcourts managed for third parties. 
  • Koufu’s 13 coffee shops are managed under the Happy Hawkers brand with other coffee shop managed for a third party.

Foodcourt revenue model.

  • Koufu uses different revenue recognition methods for foodcourts and coffee shops. General revenue streams from foodcourt/coffee shop management include fix monthly rental fee and general miscellaneous charges. Foodcourt stalls pay the higher of monthly fixed rent or variable monthly fee pegged to each stalls’ gross turnover whichever is higher. Rate on gross turnover charged depends on the foodcourt’s location or the mix of stall operators within each foodcourt. We estimate rate of gross turnover to be between 18-22% of sales.
  • Coffee shop’s revenue is more straightforward with stallholders paying a fixed monthly rental fee and general miscellaneous charges. Foodcourt and coffee shops have average occupancy rates of more than 93% over the past three financial years.
  • Other general miscellaneous charges for operating and/or managing foodcourts and coffee shops. Further to basic rent and variable fee pegged to turnover, stall holders also pay
    1. cleaning charges,
    2. maintenance fees,
    3. insurance premium contributions and administrative fees;
    4. outdoor refreshment area fees (where applicable);
    5. conservancy service fees;
    6. POS system rental for foodcourts;
    7. advertisement and promotion fees, and
    8. renovation fees for foodcourts.
  • For typical stall holders, we estimate rent and related operating expenses make up 30% of sales excluding staff and other costs.

Cash business.

  • Koufu controls cash payments to the F&B at its foodcourts through the Point of Sale (POS) systems that it provides to the stalls. Through the POS system, it is able to collect all the cash paid by customers to the F&B stalls daily. 
  • Stall operators at its foodcourts submit daily sales details and cash proceeds, which are reconciled to the POS system. Statements are issued to the stall operators fortnightly along with payment of gross sales within seven working days to them after deduction of monthly fee and general miscellaneous charges including miscellaneous fees, POS system rental charges, advertisement and promotion fees.

Third party foodcourt management.

  • Koufu has two foodcourts managed on behalf of third party owners which are located at Tampines Giant’s 21 Tampines North Drive 2, Level 3 Giant Building, and Block 548 Woodlands Drive 44, #02-34 Vista Point (for its associate entity). Fees include fixed management fee and a percentage of the total fees and other charges that are charged to the stall operators, subject to a minimum management fee for the Tampines Giant foodcourt.

Jurong West Hawker Centre and Market.

  • There is only one hawker centre under management by Koufu – the Jurong West Hawker Centre and Market located at Jurong West Street 61, awarded by NEA since October 2017. It has 34 hawker stalls and has c.500 seats, 14 market-slab stalls and a car park. Management of the hawker centre is on a not-for-profit basis, with profits channeled back into community initiatives. Under the management agreement, all profits will be used for Koufu’s proposed social causes and community initiatives. 
  • Collection of rental and other charges from the hawker stalls by Koufu are used as fixed rent payments to the NEA, day-to-day operational costs, and expenses for management and maintenance of the hawker centre, wet market and car park of the Jurong West Hawker Centre and Market.

Commercial mall – Punggol Plaza.

  • Koufu currently manages Punggol Plaza, a six-storey development with c.52 retail outlets and a wet market. Koufu has a direct lease for the mall from HDB since its opening in September 2004. The latest 3-year lease commenced on 1 August 2016. The mall generally serves the Punggol North residents and has key tenants, comprising Koufu foodcourt, NTUC FairPrice Supermarket and the wet market operator. 
  • As the mall manager, Koufu organises marketing initiatives, provides mall management services such as operations management, lease management and tenant mix planning. 
  • Revenue is derived from tenants’ rental, wet market operator’s licence fees, service charges, advertising and promotion fees and maintenance fees. Expenses include fees and expenses to any third-party agents or service providers over leasing and management activities, security services, free shuttle bus services to and from Punggol MRT station, and general cleaning and maintenance services, and onsite centre management team of one manager and two executives.

(B) F&B Retail business

F&B Retail Business.

  • Revenue from F&B retail business was S$111.3m in FY17, derived from
    1. self-operated F&B stalls located within its own foodcourts and coffee shops, third- party foodcourts, and hawker centre,
    2. F&B kiosks,
    3. QSRs and
    4. full-service restaurants.

Self-operated F&B stalls.

  • Self-operated F&B stalls are mainly the drink stalls located at Koufu’s Singapore and Macau foodcourts/coffee shops, the Jurong West Hawker Centre and Market and at one third party owned foodcourt managed by Koufu. Drink stalls sell beverages including coffee, tea and other self-made, bottled and canned drinks, beer and tobacco products. Most of its stalls also sell fruits, desserts and dim sum subject to available space.
  • Brands that Koufu uses for self-operated stalls include 1983 A Taste of Nanyang, The Western Plate, Hungry Jack and Hock Kee Hainanese Chicken Rice. Some stalls are located within third party foodcourts at 21 Tampines North Drive 2, Level 3 Giant Building and 500 Dover Road, Canteen 1, Singapore Polytechnic. There are currently 84 self-operated F&B stalls within Koufu’s and third party foodcourts and coffee shops, increase from 79 in 2017 across Singapore and Macau.

F&B Kiosks.

  • F&B kiosks serve takeaway food and beverages in two categories:
    1. tea beverages under the R&B Tea and Supertea brands; and
    2. dim sum and drinks.
  • The R&B Tea brand was established in 2017 and Supertea brand which also offer bread products was started in 2018 at Cotai Sands Central, Macau. R&B Tea kiosks provide takeaway tea while the Supertea brand is positioned to be more up market, serves artisanal bread and has a seating area. There are currently three R&B Tea kiosk outlets at Marina Square, Punggol Drive and Toa Payoh, and two SuperTea kiosk outlets at Millenia Walk and Sands Cotai Central Macau. It added a new R&B Tea kiosk at Marina Bay Sands recently.
  • Koufu also operates two F&B kiosks outside its own foodcourts and coffee shops serving dim sum and drinks inside #B1-208 The Forum, Resorts World Sentosa, and #01-01 The Shoppes at Marina Bay Sands in Singapore, which are currently occupied by Livewire by Singapore Pools.

Quick-Service Restaurants offer quick meals in Singapore and China through four brands.

  • Koufu has 11 QSR outlets operating four brands in 2017, namely 1983 Coffee & Toast, 1983 A Taste of Nanyang, Grove and Supertea.
  • Its 1983 Coffee & Toast brand, launched since 2013, offers local food including Hainanese coffee, kaya (coconut jam) butter toast sets and nasi lemak (coconut rice), which targets customers who desire quick casual local meals. They are located in educational institutions, hospitals and the Singapore Changi Airport.
  • The Grove brand offers affordable and natural meatless cuisine. The Supertea QSR sells tea beverages and artisanal bread products, a complement to its Supertea F&B kiosk.
  • Koufu has a 1983 Taste of Nanyang 41%-owned associate in Suzhou China offering local Singaporean cuisine. The associate was established in 2017 with partners Mr. Yam Chau Wang and Ms. Xiang Xu. The entity is currently making losses but the drag is insignificant. Overseas growth focus still remains in Macau.

Full-Service Restaurants, meatless cuisine through the Elemen brand.

  • Full-service restaurants offer full dining experience with table service through the Elemen brand, which serves modern interpretation of natural and meatless cuisine that serves healthy and natural food, operates on a gross floor area of 200-250 sqm. The brand represents its new focus on fostering customers’ well-being through wholesome meatless dishes and natural ingredients. 
  • The brand started since 2015 and now has three Elemen restaurants and an upcoming fourth outlet at Paya Lebar Quarter from 1Q19. Elemen is still in net losses with a mix of profitable and unprofitable stores.


Trading at 13.2x FY19F PE.

  • We find Koufu’s current valuation is attractively at 13.2x PE, below Singapore’s listed foodservice peers’ (excluding BreadTalk) average of 17x PE.
  • Peers generally trade at PE multiples between 14-25x forward EPS with the exception of BreadTalk which trades at much higher PE multiple of c.30x and above. BreadTalk’s premium is largely due to market pricing in the value of BreadTalk’s properties in Singapore and China. Otherwise BreadTalk’s core business is valued at c.18-25x as well. Furthermore, Koufu’s closest peer Kimly, which mainly owns and operates coffee shops in Singapore, trades at 17x forward PE.

Initiate coverage with BUY, Target Price: S$0.84; stock trades 13.2x FY19F PE.

  • We initiate coverage on Koufu with a BUY rating and Target Price of S$0.84, pegged at 17x FY19F earnings.
  • We like the stock for its strong cashflow generation capability, defensive earnings, and net cash balance sheet. ROAE is one of the strongest among peers, at 25.4% for FY19F.
  • Dividend yield is decent at 3.8% based on a payout of 50% of earnings. We believe the valuation gap between Koufu and peers offers a good opportunity for investors as the stock’s current PE valuation of 13.2x for FY19F is significantly lower than peer average of 17x.
  • BUY for 28% upside (excluding dividends).

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2018-08-27
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