Koufu Group - UOB Kay Hian 2020-04-24: Impact Of COVID-19 Partially Offset By Budget Relief Measures

KOUFU GROUP LIMITED (SGX:VL6)

Koufu Group - Impact Of COVID-19 Partially Offset By Budget Relief Measures

2020’s outlook remains challenging due to the impact from COVID-19, especially for outlets in Macau and MBS. Koufu Group (SGX:VL6)’s business model of charging stall tenants the higher of a fixed or variable monthly fee does however lower the risk of its food court and coffee shop operations running into losses, compared with full-service restaurants. While the budget relief measures are meaningful, we still expect a net negative impact from the outbreak.

In an effort to contain the COVID-19 outbreak that has escalated into a global pandemic, the government has rolled out a series of stricter travel measures over the past 2 months, the latest being the 24 Mar 20 ban on all short-term visitors entering or transiting through Singapore. Due to the outbreak, tourist arrivals in Singapore fell 51% y-o-y in Feb 20. Tourism receipts for F&B reached S$2.6b and S$1.8b in 2018 and 9M19.
Needless to say, F&B services are expected to take a significant hit in 2020. Latest industry data includes Singapore’s F&B services index that declined 16.6% y-o-y in Feb 20 with restaurants and food caterers being the hardest hit at -29.1% y-o-y and -31.5% y-o-y respectively. Cafes, food courts and other eating places segment fell 2.3% while the fast food outlets segment was up 5.8% y-o-y.

Koufu’s largest earnings contributors, namely Macau operations (8.4% of 2019 revenue) and its Rasapura food court at Marina Bay Sands (MBS) that are largely reliant on tourist footfall are experiencing a significant decline in sales. Tourist arrivals would likely take time to recover and may remain depressed in 2020. As such, outlook for these food courts appears challenging for this year.
That said, unlike restaurants, with Koufu’s business model of collecting the higher of a fixed monthly fee or variable monthly fee (pegged to gross turnover) from stall tenants, reduces the risk of its operations running into losses. To ensure sustainability of its stall tenants, rental rebates received are mostly being passed on.

As part of the supplementary budget 2020 announced on 26 Mar 20 aimed at assisting sectors that are the hardest hit, the food services sector will receive a 50% wage support at wage cap of S$4,600 for three quarters until Dec 20. In light of the circuit breaker, wage support has been increased to 75% for Apr- May 20.
Further, foreign worker levies due in the month of April and May will be waived; in addition, there will be a rebate of S$750 from levies paid this year for each Work Permit or S Pass holder. Collectively, assuming local hires command approximately 70% of Koufu’s total workforce, the group could receive a cash grant of S$8.5m, or approximately 20% of Koufu’s staff cost.
Although the budget relief is meaningful, at 30% of 2019 PATMI, we still expect a net negative impact and we estimate earnings to decline 25% in 2020.

For the two-month long circuit breaker, F&B outlets (including restaurants, hawker centres, coffee shops and food courts) are allowed to continue operations, however, customers are limited to take-away and/or food delivery options. We believe Koufu’s food courts located in commercial malls, higher education institutes and near offices are the most impacted.
Furthermore, as part of the additional measures introduced by the government on 21 Apr 20, stand-alone F&B outlets that only sell beverages, snacks and desserts are to be shut from 22 Apr 20 to 1 Jun 20. This would include Koufu’s R&B Tea outlets. That said, its outlets located in HDB areas form a solid base of the business at 60% of revenue.
Koufu has also partnered with delivery platforms to boost online sales. Our back-of-the-envelope calculations indicate a high-single-digit negative earnings impact from the circuit breaker.

Koufu’s cash generation ability has helped it build significant net cash of S$90.3m as at end-19, equivalent to 27% of its market capitalisation, providing the group with a large enough cash buffer to weather tough times, in our view.

We reduce our net profit estimates for 2020-22 by 24.2%, 16.8% and 15.1% respectively to incorporate a further impact from COVID-19, accounting for a recovery only in 2021 for which we forecast revenue growth of 14% y-o-y.
For 2020, we cut our revenue forecast by 16% which indicates a 12% y-o-y decline in revenue, as we expect revenue to fall by 15% for the first half while the decline should moderate to around 10% for the second half after the circuit breaker is lifted. Our 2020 earnings forecast also accounts for an estimated S$8.5m in cost savings from the budget relief measures, equivalent to 36% of 2020F earnings.

Maintain BUY with a lower PE-based target price of S$0.69, pegged at 16.6x 2021F PE or a 15% discount to peers average as we roll forward our valuation base. Koufu has the highest ROE, lowest gearing and is the most profitable among peers.
See Koufu Share Price; Koufu Target Price; Koufu Analyst Reports; Koufu Dividend History; Koufu Announcements; Koufu Latest News.

Joohijit Kaur UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-04-24

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