Koufu Group - UOB Kay Hian 2019-05-09: 1Q19 Results In Line; Serving Up Growth In SSS And New Outlets

KOUFU GROUP LIMITED (SGX:VL6)

Koufu Group - 1Q19: Results In Line; Serving Up Growth In SSS And New Outlets

KOUFU GROUP LIMITED (SGX:VL6)’s 1Q19 results were in line with our expectations. Net profit grew 12.3% y-o-y, driven by contributions from new outlets and overall growth in existing outlets.
Koufu’s food court and R&B Tea outlet openings continue to track estimates. Growth this year will come from Rasapura’s full-year contribution, new outlets and steady roll-out of R&B Tea outlets.
Given the positive outlook, we re-iterate BUY with PE-based target price of S$0.95.

KOUFU GROUP LIMITED (SGX:VL6)’s 1Q19 net profit grew 12.3% y-o-y due to higher revenue contribution from new outlets and overall growth in existing outlets.
Sales from the outlet & mall management segment increased 9.2% y-o-y while that from the F&B retail businesses segment inched up 0.7% y-o-y.
Operating profit leapt 24.2% y-o-y to S$9.2m. The increase was mainly attributable to revenue growth and adoption of SFRS(I)16 which saw part of lease expenses being reclassified as interest expenses which were partially offset by an increase in operating expenses which edged up 1.9% y-o-y.

Net margins expanded by 0.8% y-o-y to 12.0% as operating expenses held steady.
Koufu's 1Q19 operating expenses increased 1.9% y-o-y. This was mainly attributable to higher staff costs (+5.6% y-o-y) and administrative expenses (+14.3% y-o-y) which were offset by higher other income (+25.0% y-o-y).

Koufu’s solid performance had translated to a net increase in cash and cash equivalents of S$5.6m in the quarter. Net cash position as at 31 Mar 19 was at S$94.1m or 22.6% of Koufu’s market capitalisation.

Management shared that the first quarter tends to be seasonally weaker due to a short month in February as well as extended closures during the Chinese New Year period. Despite the seasonal weakness, Singapore same-store-sales (SSS) growth came in at 4-5% while Macau’s was at 8%.
Historically, SSS growth for Singapore was at 2-4%. With full-year contribution from Rasapura, new outlets ramping up and steady roll-out of R&B Tea outlets, we think net profit could grow at double-digit levels from 2019 onwards.

In the quarter, two new food courts were opened at The Woodgrove and Buangkok Square. Koufu currently has two new food courts and one new coffee shop in the pipeline for 2019.
In addition, a food court at 100AM will be closed due to a significant rental increase. Management revealed that the loss of revenue and profit contribution from that outlet is not material.

The new food court in the University of Macau opened to great fanfare as it introduced alternative food and beverage outlets within university grounds. With a student population of ~10,000, the new food court managed to attract daily footfall of 20-30% of the student population since its opening in late-April. Koufu had secured favourable lease terms and we are positive on the outlet’s growth prospects.

Management reiterated its commitment to pay out gains from sale of its central kitchens. Koufu owns two central kitchens at 18 and 20 Woodlands Terrace. We estimate the eventual sale of these properties could bring in S$10m and unlock gains of up to S$8m, which should bump up dividends.
Based on current shares outstanding, gains on the sale of the properties represents an additional 1.4 S cents per share or a 1.9% dividend yield based on a S$0.75 share price. This had not yet been factored into our 2019F full-year dividend yield.

We maintain our earnings estimates.
Risks include failure to renew leases, inability to secure new outlets, departure of key tenants and food stalls, changing consumer preferences, higher-than-expected competition, and execution risks on expansion plans.

Maintain BUY and PE-based target price of S$0.95, pegged to a 10% discount to peers’ average. Koufu’s valuation has not yet matched its growth outlook. At 14.3x 2019F PE, Koufu currently trades at a substantial discount to peers.
After taking into account Koufu’s current net cash position of S$94.1m, or 22.6% of its market capitalisation, Koufu trades at an attractive ex-cash valuation of 11.0x 2019F PE.

Yeo Hai Wei UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2019-05-09

SGX Stock Analyst Report BUY MAINTAIN BUY 0.950 SAME 0.950