Koufu Group - Phillip Securities 2020-08-05: Food As Fuel For Growth

KOUFU GROUP LIMITED (SGX:VL6)

Koufu Group - Food As Fuel For Growth

New integrated facility (IF) operational in 3Q20 will consolidate and expand Koufu Group’s central kitchen capacity boosting overall operational efficiency.
Potential special dividend from the sale of its existing central kitchen property when they move into their new integrated facility.
We like Koufu for their strong cash flow generation, defensive balance sheet and high ROE of 20.6% and 22.3% for FY21e and FY22e respectively.
Initiate with a BUY recommendation and a target price of $0.80.

Koufu Group (SGX:VL6) is a household name in Singapore, well known for its chain of food courts and coffee shops under management. Koufu has expanded rapidly over the years and now operates a multitude of brands island-wide.
As at end 2019, Koufu operates 50 food courts (including 2 in Macau), 16 coffeeshops, 76 F&B retail stalls (including 4 in Macau), and 26 R&B Tea and Supertea in Singapore.

The new integrated facility will house a larger central kitchen and expand Koufu’s central procurement, preparation, processing and distribution functions. This is expected to improve its overall productivity and operational efficiency. With a gross floor area (GFA) of 20,000 sqm, this is more than five times larger than their current central kitchens and corporate headquarters.

Koufu currently owns two central kitchens at 18 and 20 Woodlands Terrace, which can either be used for the Group’s future expansion plans or could be sold with the disposal proceeds to be distributed to shareholders. We estimate the sale of these properties to be around S$10m with the Group realising an S$8m gain from this. This translates to an additional 1.4 Singapore cents or an additional 2.1% dividend yield.

Koufu’s strong cash flow generation capability, defensive earnings and superior ROE (superior net margin and highest profit per outlet vs. sector) place them well above their peers. We expect Koufu to remain profitable for FY20e and generate cash flows of about S$25m every year, which will support their dividend payout.

We are positive on the outlook. We see the recovery in consumption post circuit breaker will be a huge positive for Koufu. The new integrated facility is expected to be operational from 3Q20, which will see cost savings and additional revenue.
For 3Q20, Koufu is also expected to open two new food courts and two new R&B tea kiosks.

We initiate coverage on Koufu with a BUY recommendation and a target price of $0.80. We peg Koufu to a PE of 18.5x FY21e, which is the sector average.
We view Koufu as best in class with a defensive business model and superior growth profile from their overseas expansion plans and the expansion of their new concepts (R&B Tea and their premium vegetarian Elemen restaurants).
We like their historical record of generating positive free cash flow and forecast the Group to generate strong free cash flow of S$25m a year from FY20e to FY22e. Koufu's strong balance sheet (FY19 net cash of S$86m or S$0.15 per share) puts them in good stead to ride out the current crisis as well as to take advantage of M&A activities to grow.
See Koufu Share Price; Koufu Target Price; Koufu Analyst Reports; Koufu Dividend History; Koufu Announcements; Koufu Latest News.
See attached 20-page initiation coverage report in PDF for complete analysis on Koufu Group (SGX:VL6).

Terence Chua Phillip Securities Research | https://www.stocksbnb.com/ 2020-08-05

SGX Stock Analyst Report BUY INITIATE BUY 0.80 SAME 0.80