Koufu Group - DBS Research 2019-11-05: Growth From New Outlets & Better Operational Efficiency

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KOUFU GROUP LIMITED (SGX:VL6)

Koufu Group - Growth From New Outlets & Better Operational Efficiency

• KOUFU GROUP (SGX:VL6)'s 3Q19 earnings in line, growth led by new outlets.
• Margins expanded on better operational leverage.
• Regional expansion ongoing with new tea outlets to open in Malacca.
• Maintain BUY and S$0.88 Target Price.

3Q19 earnings in line, growth led by new outlets.

• Excluding exceptionals, Koufu's 3Q19 net profit of S$7.1m (+19.4% y-o-y) was in line with our estimate. This was led by revenue expansion of 6.6% y-o-y to S$61.4m and operating profit growth of 37.3% to S$9.35m. F&B Retail and Outlet management segments each contributed S$30.1m to revenue. See Koufu Announcements; Koufu Latest News.
• Outlet management revenue grew 6% y-o-y, led by 2 new food courts at 164 Kallang Way and Millenia Walk as well as higher revenue from most of its food courts and coffee shops. Revenue from F&B retail grew by 7.1% y-o-y, largely supported by contribution from 2 recently opened food courts and coffee shops and 5 new F&B kiosks at JEMS, Far East Square, VivoCity, White Sands and SMU, as well as revenue growth from most of its food courts and coffee shops.

Higher margins, better operational leverage.

• Pre-tax margins improved by 3.1ppts from 9.8% to 13.9%, largely due to better operational leverage.
• While gross margins declined by 0.4ppt to 84% due to sales mix, headline operating margins including effects if FRS (I) 16, increased by 3.4ppts as operating cost-to-sales ratio dropped by 3.8ppts to 68.7% as sales increase in existing outlets helped contribute to the better operating leverage and margins.

Store expansion underway.

• Two new foodcourts are due to open in FY20F including one in Macau. The number of tea outlets in Singapore and Macau currently stand at 25 and will reach 29 by the end of this year, and this includes Koufu’s first outlet in Malacca. Its integrated facility is expected to obtain its temporary occupation permit by 1H 2020.

Maintain BUY and S$0.88 Target Price.

• We continue to like Koufu for its stable earnings, decent yield of 3.4%, decent cashflow generation, strong balance sheet, and steady store expansion plans.
• No change to our earnings and S$0.88 Target Price based on 17x FY20F PE. See Koufu Share Price; Koufu Target Price.

Kee Yan YEO CMT DBS Group Research | Janice CHUA DBS Research | https://www.dbsvickers.com/ 2019-11-05

SGX Stock Analyst Report BUY MAINTAIN BUY 0.880 SAME 0.880