Kimly - RHB Invest 2019-05-09: Costs Continue To Hamper Profitability


Kimly - Costs Continue To Hamper Profitability

  • Maintain NEUTRAL, with new DCF-based Target Price of SGD0.23 from SGD0.24, 2% downside.
  • KIMLY LIMITED (SGX:1D0)'s 2QFY19F (Sep) revenue rose 4.7% y-o-y, but PATMI dropped 13.2%, due to higher selling and distribution expenses.
  • Kimly should continue to expand its footprint and diversify product offerings, as well as synergise central kitchen operations. However, after accounting for higher distribution and selling expenses, our FY19F PATMI drops 4%. With ongoing investigations likely to create an overhang on the stock, we make no change to our call.

Kimly 2Q19 underperformance

  • Despite topline growth of 4.7% y-o-y, Kimly's 2Q19 PATMI declined by 13.2%. This was on the increase in selling and distribution expenses from higher online delivery fees and packing materials used, as well as a hike in administrative expenses.

Own brand of coffee and tea.

  • As part of efforts to cater to the public’s preference for healthier dining options, Kimly has developed its own brand of iced coffee and tea, to be sold at all its coffee shops. This should help to improve margins further going forward.

Growth strategies in place

  • Management is keen to expand its portfolio of coffee shops and product offerings. At the same time, it is streamlining outlet operations and further optimising its central kitchen to improve profitability.

Maintain NEUTRAL

  • As the acquisition of Asian Story Corp has been called off, our investment thesis is no longer valid. Ongoing investigations on the matter is likely to be an overhang on the stock and generate some negative sentiment.
  • We believe any potential upside will be limited, despite Kimly’s reasonable valuations.
  • In addition, after accounting for higher distribution and selling expenses, our FY19F PATMI is lower by 4%, which leads to a lower Target Price of SGD0.23.
  • Dividends are likely to increase as management has doubled interim payout, which affirms the positive strong cash generation from its core business.
  • Downside risks to our call include a rise in rental rates, and labour shortages.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2019-05-09
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 0.23 DOWN 0.240