Kimly - UOB Kay Hian 2020-10-09: Beneficiary Of Heartland Presence And Lower Price Points; Initiate Coverage With BUY

KIMLY LIMITED (SGX:1D0)

Kimly - Beneficiary Of Heartland Presence And Lower Price Points; Initiate Coverage With BUY

Kimly (SGX:1D0) is the largest coffee shop operator in Singapore with outlets across the heartlands, in close proximity to much of the population. We expect Kimly to benefit from COVID-19, with consumers becoming increasingly price sensitive.
With high net cash of S$69m, Kimly offers a higher dividend yield vs peers (6% for FY20F). The addition of five coffee shops in 1H20 will boost EP growth for FY21-22.

Kimly Limited (SGX:1D0), together with its subsidiaries, is one of the largest traditional coffee shop operators in Singapore with more than 25 years of experience in the coffee shop and F&B industry. The group operates and manages an extensive network of 72 food outlets under - “Kimly”, “foodclique” and a third-party brand under the outlet management division. Under the food retail division, Kimly has 135 food stalls selling mixed vegetable rice, Teochew porridge, dim sum, seafood “zi char”, a Kanaaji Japanese Tonkatsu, two Tonkichi restaurants and nine Rive Gauche confectionery shops.
Kimly is constantly modernising to keep up with the times and changing consumer trends. It has adopted cashless electronic payment systems at a few of its food outlets while automating many of its mixed vegetable rice stalls and zi char stalls with machinery to improve quality and consistency. Also, Kimly has also increased its reach through online delivery platforms such as Deliveroo, Foodpanda, GrabFood and Oddle.
Kimly’s management team is made up of individuals with proven track records in the F&B industry. The group is helmed by Mr Lim Hee Liat, who has more than 25 years of experience in the F&B industry. He is assisted by senior management, most of whom have many years of experience in the F&B industry.

Under the outlet management division, Kimly operates and manages 65 coffee shops and four industrial canteens under the “Kimly” brand and a third-party brand, and three food courts under the “foodclique” brand.
Kimly has maintained a healthy occupancy rate of 98% for a total of over 500 stalls within its managed food outlets for the past 5 financial years.

Catering to a broad and varied customer base and supported by its central kitchen, Kimly has 135 stalls, a Kanaaji Japanese Tonkatsu food stall, two Tonkichi restaurants and nine Rive Gauche confectionery shops under its portfolio. Stores under its portfolio include 31 mixed vegetable rice, 22 “rice garden” restaurants, 3 Teochew porridge, 50 dim sum and 29 seafood ‘zi char’ stalls.

To support its food retail division, Kimly has set up a central kitchen to prepare sauces, marinated meats and dim sum that are subsequently supplied to its stalls. The central kitchen is helmed by award-winning chef Mr Seng Kim Boon, who has taken part in various international culinary competitions. A central kitchen facility allows Kimly to centralise procurement and standardise common food production processes across outlets within the group, where minimal preparation is required before serving to the customer.
More importantly, a central kitchen concept helps improve productivity by reducing costs through economies of scale. Labour-wise, it serves as an efficient recruitment strategy due to less skill requirements and training needed for staff at its food stalls. In terms of infrastructure, less kitchen space and equipment are required at the food stall outlets.

Kimly is currently trading at 11.1x FY21F PE, and we opine this is unjustified as Kimly has the second-best net margins vs peers while its ROE and net cash position are higher than that of its Singapore peers, losing out only to Koufu (SGX:VL6).
With the highest FY19 dividend yield of 6.2% among regional peers, we believe Kimly should be trading at a valuation nearer or on a par with its Singapore peers’ 16.5x 2021F PE or nearer to its closest rival, Koufu (13.0x 2021F PE).

Unlike its Singapore peers, Kimly is in a healthy net cash position and boasts the highest 2019 dividend yield at 6.2% as compared to peers, backed by strong and consistent annual operating cash flows of S$26m-28m.
Although Kimly had recently embarked on an acquisition spree, we expect it to maintain a strong dividend yield of 4-5% as management has stated they will pay no less than a 50% dividend payout ratio, assuming no huge unexpected future capex.

We analysed Kimly’s ROE composition vs that of Singapore peers (including Koufu (SGX:VL6), Japan Foods (SGX:5OI) and Jumbo Group (SGX:42R)) and found that Kimly has the second-highest margins and asset turnover. See PDF report attached below for details. This is significant for a company in the F&B industry. Also, Kimly enjoys a relatively low asset-to-equity ratio among its peers.
We attribute the low multiple to Kimly’s strong operating cash flows and minimal debt on its balance sheet. However, we expect this ratio to increase slightly as Kimly takes on more acquisitions in the future.

Llelleythan Tan UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | https://research.uobkayhian.com/ 2020-10-09

SGX Stock Analyst Report BUY INITIATE BUY 0.36 SAME 0.36