Koufu Group Ltd - DBS Research 2019-08-08: Foodcourts Driving Growth

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KOUFU GROUP LIMITED (SGX:VL6)

Koufu Group Ltd - Foodcourts Driving Growth

Maintain BUY, Target Price raised to S$0.88.

• We remain positive on KOUFU GROUP LIMITED (SGX:VL6) and maintain our BUY recommendation with a higher target price of S$0.88 after rolling over FY19F PE to FY20F.
• Koufu is on track to deliver earnings growth via turnaround of its kiosk businesses and improving foodcourt performance. We continue to like the stock for its sound fundamentals including stable earnings, strong balance sheet, cashflows, ROAE, and decent dividend yield of 3.5-3.6%.
• Koufu's valuation is attractive at 13.8x FY20F PE, below peer average of 17x.

Where we differ.

• Our forecasts are below consensus as we are more conservative than the street on
  1. breakeven period of Koufu’s kiosk business;
  2. overseas earnings growth potential; and
  3. foodcourt performance in Singapore.
• Nonetheless, we are still positive on the above drivers albeit less aggressive.

Potential catalyst.

• This will stem from 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 - Foodcourts driving growth

1Q19 earnings in line, growth driven by foodcourts:

• Koufu's 1Q19 revenue of S$58.1m (+7.3% y-o-y) and core earnings of S$7.13m (+17.3% y-o-y) were in line with our estimates.
• Revenue was driven by Outlet and Mall Management segment which grew 11% y-o-y to S$29.5m while F&B retail segment grew 3.6% y-o-y to S$28.6m. Margin expansion was largely from uplift from foodcourts.
• An interim DPS of 1 Sct has been declared, against our 2.5-Sct DPS expectation for the full year. See Koufu's dividend history.

Foodcourts firing on all cylinders:

• Revenue growth in foodcourts was driven by new outlets from University of Macau, Marina Bay Sands outlet (which was closed for four months for renovation last year), and overall improvement in all other foodcourts.
• Profit before tax improved to S$8.59m (+19.1% y-o-y) as both cost of sales and operating expenses grew at a slower pace (+2.9% y-o-y to S$9.1m and +4.4% y-o-y to S$39.8m). The uplift in margins was largely contributed by foodcourts as the business has high operating leverage, with excess revenue beyond fixed costs capable of flowing straight into profits.

Growth and investment thesis remains intact:

• We continue to be positive on Koufu as growth remains on track to meet our estimates. Uplift from full 12-month contribution of MBS outlet is coming through and turnaround of kiosk operations remains on track.
• New outlets continue to open, with the number of tea kiosks targeted to reach 25 by end-FY19F from 22 currently. Two new Elemen restaurants at Paya Lebar and Great World City will contribute from 3Q19 onwards. Four new foodcourts are also due to open going forward. The tea kiosk business is also growing overseas with plans to open more outlets in Macau, Indonesia, Malaysia, Philippines and Australia.

Maintain BUY, Target Price adjusted higher to S$0.88 after rolling over earnings base to FY20F:

• Our earnings estimates are unchanged since results are in line. Our 17x PE-based Target Price however is raised from S$0.85 to S$0.88, after rolling over our earnings from FY19F to FY20F.
• We continue to like Koufu for its sound fundamentals including stable earnings, strong balance sheet, cashflows, ROAE, and decent dividend yield of 3.5-3.6%.
• Maintain BUY.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-08-08

SGX Stock Analyst Report BUY MAINTAIN BUY 0.88 UP 0.850