Koufu Group - UOB Kay Hian 2020-07-03: Proposed Acquisition To Provide Synergistic Effects

KOUFU GROUP LIMITED (SGX:VL6)

Koufu Group - Proposed Acquisition To Provide Synergistic Effects

Koufu recently announced a proposed acquisition of Deli Asia, a traditional food and dough products group and one of Koufu’s largest suppliers. Apart from complementing Koufu’s current range of products, the acquisition would provide operating synergies through the consolidation of manufacturing capabilities of Deli Asia group within Koufu’s new integrated facility in 2H20.
We estimate earnings accretion of 8.2% in 2021.

Koufu Group (SGX:VL6) announced on 1 Jul 20 that it has entered into a sales and purchase agreement to acquire Deli Asia, Delisnacks, Dough Culture and Dough Heritage (collectively known as “target group”) for S$22.04m. See Koufu's Announcements.
Founded by Mr Alex Ong and his wife, Ms Irene Lee in 1993, the group is a manufacture and producer of fried food and dough products, supplying frozen and partial fried food products to mainly restaurants and F&B stalls at food courts, coffee shops and hawker centres. Apart from supplying fried food products, the group also licenses its Delisnacks brand to approximately 60 F&B stallholders that retail its products. In addition, the group retails its food products, including Chinese desserts and drinks, directly to customers under the Dough Culture brand through seven retail kiosks in Singapore.

The target group’s 2019 net profit of S$2.4m and net tangible assets of S$6.5m value the deal at 9.1x 2019 PE and 3.4x P/NTA. The acquisition is expected to be completed by end-Jul 20 and will be fully funded by internal resources, including net proceeds from its IPO.
As at end-19, Koufu’s net cash stood at S$90.3m.

In addition to complementing Koufu’s current range of dim sum food sold in its food stalls, the proposed acquisition also provides cost synergies as the target group is one of Koufu’s largest suppliers of fried food and dough. The target group will shift the production facilities and warehouse to Koufu’s new integrated facility that is slated to be completed in 2H20.
Apart from rent savings, the consolidation of the manufacturing process should lead to cost efficiencies from an improvement in economies of scale. Overall, we estimate earnings accretion of approximately 8.2% in 2021.

We understand that the business of the target group has been relatively resilient during the circuit breaker period as it predominantly caters to the mass consumer take-away market. Koufu plans to expand the retail kiosks network under the Dough Culture brand from the current seven to at least twenty in the next five years.
Furthermore, through the supply of frozen and partial fried food products to third party businesses, including supermarkets and exports to overseas markets, Koufu would be able to strengthen its distribution network and gain access to new markets.

We raise our net profit for 2021-22 by 8.2-8.5 % as we factor in the earnings contribution from the acquisition. We do however conservatively lower our 2020 earnings by 9.1% as we expect a slower recovery for its operations in Macau as the travel bubble plan for Hong Kong, Macau and Guangdong province has stalled.

Maintain BUY with a higher PE-based target price of S$0.78, pegged at 17.2x 2021F PE or 20% discount to peers average (16.6x previously). Koufu has the highest ROE, lowest gearing and is the most profitable among local peers.
See Koufu Share Price; Koufu Target Price; Koufu Analyst Reports; Koufu Dividend History; Koufu Announcements; Koufu Latest News.
Koufu's share price catalysts:
- Sale of two central kitchens and special dividend.
- Easing of travel restrictions.
- Strong-than-expected recovery from COVID-19 impact.

Joohijit Kaur UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-07-03

SGX Stock Analyst Report BUY MAINTAIN BUY 0.78 UP 0.690