Koufu Group Ltd - DBS Research 2019-06-27: Time To Whet Your Appetite


Koufu Group Ltd - Time To Whet Your Appetite

  • Expect operational turnaround to drive earnings growth.
  • Supertea, R&B Tea kiosks and lower depreciation to contribute more positively to earnings.
  • Raise FY19-20F earnings by 7% each.
  • Upgrade to BUY with a higher Target Price of S$0.85.

Upgrade to BUY, Target Price raised to S$0.85.

  • We turn positive on KOUFU GROUP LIMITED (SGX:VL6) and upgrade our recommendation to BUY with a Target Price of S$0.85, as we expect the group to post higher net earnings growth of 8.8% in FY19F.
  • Post our downgrade on 7-May (see report: Koufu Group Ltd - DBS Research 2019-05-07: Time To Take A Pause), the stock has declined by close to 12%. Earnings growth will be driven by the turnaround of its foodcourt and kiosk businesses.
  • We raise our FY19-20F earnings forecasts by 7% each as we impute
    1. positive contribution of the Supertea and R&B kiosk business;
    2. better foodcourt sales efficiency; and
    3. lower depreciation.
  • Valuation is now more palatable at 13.1x FY20F PE with visible growth drivers.

Where We Differ:

  • We are more positive than previously, as stock valuations have declined from 16x to 13.1x FY20F PE, post the recent price correction. Fundamentals continue to be sound, with strong cashflow-generation, defensive earnings, net cash position, and strong return on average equity (ROAE).

Potential catalyst.

  • This will stem from reaping the benefits of economies of scale over the long term and special dividends from sale of its existing central kitchen property before moving into the new integrated facility.
  • Longer-term drivers include the setting up of an integrated facility aimed at delivering economies of scale, and overseas growth from Macau.

WHAT’S NEW - Expect growth to come through

The stock has corrected by close to 12% since our downgrade; its valuation at c.13x forward PE is now more attractive:

  • Since our downgrade post 1Q19 earnings, Koufu’s share price has corrected by close to 12%. The stock currently trades at c.13x forward earnings which we believe is now priced more attractively than during our point of downgrade at c.16x forward earnings.

Earnings expectations to improve:

  • We expect our prior expectations, led by R&B Supertea kiosk outlets, higher foodcourts, and relatively lower of lower depreciation.
  • We also see higher store for R&B Supertea kiosks with our new stores now faster than anticipated.

Lower depreciation from stores:

  • We believe depreciation will be lower than 10 foodcourt and restaurant outlets which were opened in 2015 and 2016. Based on Koufu’s depreciation policy over three-year lease periods, these outlets would be fully depreciated by 2019.
  • We estimate that the net outlets opened outlets within the last three S$1m this year.

Kiosk business to contribute to FY20F growth.

  • Based on Koufu’s current pipeline and planned store opening of R&B and Supertea outlets, we believe the aggressive rollout will add to our revenue projections. Koufu had 10 kiosk outlets (including one in Macau) in FY18 which incurred a marginal loss in FY18.

Raising sales-per-outlet assumption to factor higher same-store sales:

  • We increase our annual sales per outlet assumption for Outlet and Mall Management segment from S$1.7m to S$1.74m to factor in better sales efficiency at its foodcourts.
  • We anticipate the run rate for same-store sales to be healthy at 3-5% going forward. Hence, we are now more optimistic on our revenue forecast for the Outlet and Mall Management segment by 2-3% at S$115m/S$120m for FY19F/FY20F.

More positive for ‘other eating places’ F&B retail sales on real wage increase:

  • Primarily a foodcourt operator, Koufu’s sales are generally classified under ‘other eating places’ in Singstats’ Singapore retail sales segmentation. Foodcourts are neither restaurants, fast food outlets nor caterers and hence sales would be classified under ‘other eating places’.
  • We have seen a retail sales index in recent months. The consumer sentiment for ‘other eating places’ sales has 2017 and 2018. This can be attributed to the decline in GDP growth where consumers are switching from higher-end F&B foodservice outlets to more economical coffeeshops, foodcourts and hawker centres.

Raise FY19-20F earnings by 7% each.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-06-27
SGX Stock Analyst Report BUY UPGRADE HOLD 0.85 UP 0.800