Koufu Group's 3Q20 Business Update - UOB Kay Hian 2020-11-23: Recovery In 2H20

KOUFU GROUP LIMITED (SGX:VL6)

Koufu Group's 3Q20 Business Update - Recovery In 2H20

Koufu's same-store sales (SSS) declined by 20% y-o-y in Jul-Oct 20, an improvement from 2Q20’s 40% y-o-y decline. Sales at outlets in the heartlands and full-service restaurants have improved significantly. However, outlets at the downtown, tertiary education and tourist spots remained impacted by low footfall. This would be partially mitigated by government grants in 2H20.
Koufu's future growth drivers are contributions from Deli Asia, new outlets and gradual resumption of activities.
Maintain BUY. Target price: S$0.73.

Koufu Group (SGX:VL6) provided a business update, guiding that same-store sales (SSS) declined by over 20% y-o-y in Jul-Oct 20. This is a sequential improvement compared to the 40% y-o-y decline on a SSS basis in 2Q20.
Koufu also guided that operating profits in 2H20 are expected to see a significant improvement compared to 1H20, albeit significantly lower compared to 2H19’s. The expected y-o-y sales decline in 2H20 is mainly on the back of lower footfall at food courts near offices and tourist hotspots at the Marina Bay Sands - Singapore and Cotai Sands - Macau.
On the flip side, food courts and coffee shops located in the heartlands and its full-service restaurants (Elemen) have seen significant improvements after the resumption of dine-in services in Phase 2.

Koufu also highlighted that there could also be higher impairment losses on plant, property and equipment and right-of-use assets. However, the impact to earnings from the impairment and weaker sales of harder hit outlets should be partially mitigated by government grants. To recap, Koufu received S$5.5m worth of grants in 1H20.
For 2H20, we estimate further cash grants of S$5m, mainly relating to the Jobs Support Scheme (JSS).
In addition, Koufu will also receive cash grants from the JSS in 2021, albeit at a lower quantum of around S$2m, based on our estimates, or approximately 8.5% of 2021F earnings.

Since Sep 20, arrivals from China are not required to undergo quarantine in Macau if they present a negative nucleic acid test (NAT) certificate. However, arrivals from Hong Kong and Taiwan have to present a negative NAT certificate and must undergo 14 days of centralised isolation medical observation. With the easing of border restrictions, Macau saw 449,000 visitors in Sep 20, a substantial improvement over Aug 20 (227,000) and Jul 20 (77,000) but still down by 83.8% y-o-y.
Koufu has recently opened a new outlet at Nova City, Macau as the lease was secured in 2019. While sales in Macau have been significantly impacted from the lack of tourists, occupancy rate at its outlets remain at 100% as rental waivers and rebates from landlords are mostly passed down to stallholders.

In addition to the two coffee shops and one R&B Tea store opening in Jan 20, Koufu has opened a R&B Tea Kiosk (Change Alley Mall) in Oct 20 and a food court (Le Quest, Bukit Batok) in Nov 20.
Upcoming openings in 4Q20 include a quick service restaurant outlet by Grover and Dough Culture at Canberra Plaza and two R&B Tea Kiosks at Fusionopolis and Le Quest.

Koufu's acquisition of Deli Asia was completed in Jul 20 and we estimate S$2.3m of earnings contribution in 2021, or 9.8% of net profit. We highlight that Deli Asia’s sales has grown in 2020 in spite of the circuit breaker measures. Therefore, apart from being an earnings contributor, Deli Asia adds resiliency to the group’s portfolio, in our view.
In addition, we think outlets near offices and tertiary educations should gradually recover in 2021 as business activities resume and local COVID-19 cases come under control. Other areas of growth would also include contribution from the master franchise agreement with Shakey’s Pizza in Philippines through franchise, royalties and marketing fees.

Koufu expects the TOP to be obtained in 1Q21 and operations in the integrated facility at Woodlands - Singapore to commence by 2Q21. Management shared that of the total area allocated for tenancy (25% of total GFA), 75% of tenancy has been finalised. The group is actively securing tenants for the remaining.
We estimate that the integrated facility could contribute to S$1.5m-2m (net of operating cost) of earnings once fully operational.

Koufu’s cash generation ability has helped it build a significant net cash of S$72m as at end-1H20, equivalent to 20% of its market capitalisation, providing the group with a large enough cash buffer to weather tough times.

We lower our Koufu's 2020 earnings forecast by 19% as we factor in impairments. The impairment was due to the weak performance of some stalls due to COVID-19. 2021 and 2022 earnings forecasts remain largely unchanged.
Maintain BUY on Koufu with target price of S$0.73, pegged at 17.2x 2021F PE or approximately 15% discount to peers’ average.
See Koufu Share Price; Koufu Target Price; Koufu Analyst Reports; Koufu Dividend History; Koufu Announcements; Koufu Latest News.
Catalysts to Koufu's share price:
- Easing of travel restrictions in Singapore and Macau.
- Sale of two central kitchens and special dividend.

Joohijit Kaur UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-23

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