Koufu Group - CGS-CIMB Research 2020-12-14: Heartlands Is Where The Help Is


Koufu Group - Heartlands Is Where The Help Is

  • Koufu revealed that Singapore footfall is getting better, led by heartland food courts and coffee shops. However, its Macau footfall is still lagging behind.
  • We have penciled in Koufu's FY20F earnings to fall 59.6% y-o-y but for it to recover gradually in FY21F as most of Koufu’s markets rebound.
  • We like Koufu’s market positioning and strong balance sheet. Reiterate ADD with a higher target price of S$0.94 as we roll forward to FY22F earnings.

Singapore footfall improved, led by the heartlands

  • Koufu (SGX:VL6) revealed it has resumed operations of all outlets, including dine-in services, since 19 June (in Phase 2 of the reopening of the economy). Its Singapore food courts and coffee shops, especially those located in the heartlands, as well as the R&B tea kiosks and 4 full-service restaurants have seen significant improvements in footfall and revenues after the resumption of dine-in services.
  • However, Koufu guided that footfall for food courts located near offices, downtown areas, tertiary institutions as well as tourist hotspots remains low. We think this is in line with Singapore F&B retail statistics, which showed that cafés, food courts and other eating places have recovered ahead of the overall Singapore F&B space and their restaurant counterparts, as of Oct 20.

Macau still hurting

  • According to Koufu, business operations in Macau have been muted since Feb 20. Although mainland China and Macau have slowly reopened borders and the 14-day mandatory quarantine policy on all visitors crossing the Macau-Guangdong borders have been lifted since Jul 20, business operations are still at a reduced level given the lower number of visitors and travellers generally.

Integrated facility commencement slightly delayed

  • The expected temporary occupation permit date (TOP) for Koufu’s integrated facility has been delayed to 1Q21F while commencement of operations has been delayed to 2Q21F (from TOP by 4Q20F and commencement of operations by 1Q21F previously).
  • Of the 20,000 sq m of total GFA, Koufu said it will use 75% for its operations (this includes central kitchens for production of food offerings, inclusive of Deli Asia, as well as Koufu’s corporate headquarters). The remaining 25% of GFA is targeted to be rented out to tenants in the F&B industry to operate their own central kitchens.
  • In its latest business update, Koufu mentioned that 75% of the space allotted for tenants has already been rented out. See Koufu's announcements.

Lower Koufu's estimated earnings for FY20-22

  • In its business update, Koufu mentioned that its operating profit for 2H20 is expected to be significantly lower than 2H19 as footfall is still low and the new outlets opened in FY19 are still in stabilisation mode. Koufu also said that it will record a higher impairment loss on its Property, Plant and Equipment (PPE) and ‘Rights-Of-Use’ (ROU) assets for FY20F due to the impact of COVID-19 on the business. As such, we think that we were previously too aggressive regarding net margins for FY20F and the pace of recovery in FY21-22F.
  • We lower our FY20/21/22F PBT margin forecasts to c.7.7%/12.2%/13.8% (vs. 11.1%/13.6%/14.1% previously) for Koufu. Our changes take our Koufu's FY20/21/22F estimated net profit down by 32.1%/18.4%/4.1%.

Reiterate ADD on Koufu with higher target price

  • We still like Koufu for its resilient F&B business given its exposure to Singapore’s heartlands, which will fare better than its premium counterparts, in our view. Moreover, its strong balance sheet (S$72m net cash as of end Jun-20) accords it dry powder to weather these volatile times and the ability to cash in on any M&As that could emerge.
  • See Koufu Share Price; Koufu Target Price; Koufu Analyst Reports; Koufu Dividend History; Koufu Announcements; Koufu Latest News.
  • We reiterate our ADD call but with a higher target price of S$0.94 (vs. S$0.86 previously) as we roll forward to FY22F earnings, still pegged to 19x (close to its 2018-2019 (listed on Jul 2018) average of 19.8x).
  • Potential rerating catalysts include higher-than-expected store wins and faster improvement in F&B footfall.
  • Downside risks are a second wave of COVID-19 infections and poor overseas execution.

Cezzane SEE CGS-CIMB Research | https://www.cgs-cimb.com 2020-12-14
SGX Stock Analyst Report ADD MAINTAIN ADD 0.94 UP 0.860