Koufu Group - DBS Research 2020-02-13: Marginal Impact On Macau


Koufu Group - Marginal Impact On Macau

  • We remain positive on Koufu Group (SGX:VL6) and maintain our BUY recommendation but with a lower Target Price of S$0.84, which offers an c.18% upside including dividends.
  • We have reduced our earnings forecasts in view of lower footfall from casino operators undergoing a 15-day suspension of gaming operations in Macau. We believe Koufu will be affected marginally with close to 10% of its revenue coming from Macau.
  • Nonetheless, we continue to like the stock for its sound fundamentals including stable earnings, strong balance sheet, cashflows, ROAE, and decent dividend yield of 3.4% with long-term growth expected to be driven by a larger store network and better operating scale.

Closure of Macau casinos for 15 days will affect tourist arrivals and spending:

  • Macau has asked its casino operators to suspend operations for two weeks as a measure to curb the spread of the coronavirus. The gaming sector, including gaming operations and hotels, is undergoing a 15-day closure from midnight 5 February and resuming on 20 February.
  • Over a two-week period, Macau is expected to lose about 1.5m visitors. Macau had 36m visitor arrivals in 2018 and 39m in 2019 (+10.1% y-o-y). This works out to a mean of 758,000 visitors per week and about 1.5m visitors over two weeks.
  • F&B expenditure accounts for a small proportion of Macau’s visitor spending. Total visitor expenditure in Macau totaled US$41bn in 2018 and close to US$30bn for CY9M19. Out of the total, non-gaming expenditure accounted for 25% while F&B made up about 20% of non-gaming expenditure.

Koufu has foodcourts, stalls and kiosks in Macau.

  • Koufu currently operates just two foodcourts (at Sands Cotai Central and University of Macau) and four stalls, along with one tea kiosk in at the University of Macau, which contribute to close to 10% of revenue. In contrast, it operates 49 foodcourts and 23 kiosks in Singapore contributing to about 90% of revenue.

Why Sands is strategic to Koufu.

  • Koufu’s foodcourt footfall in Macau is exposed to landlord Sands China’s properties located at Cotai including The Venetian Macao, The Plaza Macao, Sands Cotai Central, and The Parisian Macao. Sands also has Conrad, Sheraton and St Regis hotels in that area that contribute to captive footfall to the foodcourt.
  • Sands is a key gaming player in Macau and together with Galaxy, they command about 45% of Macau’s gaming market share. Only Sands Macao is located outside of Cotai. Sands China has close to 13,000 rooms and about 150 restaurants and food outlets.

Expect F&B sales and rental income to be affected.

  • Koufu’s foodcourt business profits are very much derived from rental income from stalls and a percentage of sales collected from stall tenants spending at foodcourts. Loss of footfall will affect its drink stalls’ sales within the food courts as well.
  • Rental wise, while we expect rental relief from the landlord over this period, it is reasonable to assume that this benefit will also be passed on to stallholders resulting in lower revenue and profit as well. We believe margins are higher in Macau due to lower operating costs and better operating leverage from lower depreciation heading towards end of lease period.

Loss of rental income, F&B sales to affect FY20F earnings.

  • As mentioned above, we see a loss of revenue and profit in Macau due to reduced footfall and lower rental income. The impact is not expected to be big for Koufu, with Macau’s contribution estimated at only 10% of annual sales. With better operating leverage in Macau vis-à-vis Singapore outlets, we believe Koufu’s Macau full-year earnings contribution to be substantial (at > 10%).
  • Nonetheless, it will be partial impact for the full year as suspension of gaming operations is limited to 15 days and Koufu’s outlets in Macau remain in operation. Koufu’s overall earnings remain largely dependent on its Singapore operations, with Marina Bay Sands foodcourt outlet a key contributor.

Cut FY20-21F earnings by a marginal 4-5%.

  • We do not expect any signification deviation for FY19F earnings, due to be reported at end-February. Growth for FY19F will largely be driven by contribution of better-performing new outlets including higher sales and better footfall, absence of poorer-performing outlets and better operational efficiency.
  • However, in view of the situation in Macau, we are reducing our FY20-21F earnings forecasts by 4-5%. This takes into account
    1. poorer sales and footfall in Macau; and
    2. lower rent revenue and profit from Macau due to subsidising stallholders’ rental in relation to the 15-day suspension of gaming operations.

Maintain BUY with S$0.84 Target Price.

  • Post earnings adjustment, our Target Price based on 17x FY20F PE is lowered to S$0.84. The stock is now trading at 14.9x FY20F PE, at +0.5 SD of its historical mean PE valuation.
  • We continue to like Koufu for its earnings resilience, strong balance sheet, and decent dividend yield of 3.4%, excluding any special dividend it might declare if it sells its existing Woodlands central kitchen property.
  • FY19 results are expected to be released at the end of February and we expect the numbers to be robust.
  • Maintain BUY with c.18% upside including dividends.
  • See Koufu Share Price; Koufu Target Price; Koufu Analyst Reports; Koufu Dividend History; Koufu Announcements; Koufu Latest News.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-02-13
SGX Stock Analyst Report BUY MAINTAIN BUY 0.840 DOWN 0.88