Koufu Group - SAC Capital 2021-03-05: Earnings Rebound In FY2021

KOUFU GROUP LIMITED (SGX:VL6)

Koufu Group - Earnings Rebound In FY2021

Koufu (SGX:VL6) saw a 19.0% decline in revenue from S$237.5 million in FY2019 to S$192.4 million in FY2020 mainly from the outlet and mall business segment, largely due to a decrease in fixed rental income. The decline in F&B retail segment was due to lower footfall, especially at tourist spots and near offices.

Net profit declined by a larger 64.3% from S$13.6 million to S$7.3 million due to the high degree of operating leverage. The decline in net profit was partly due to Koufu passing down the rental rebate and property tax rebate and cash grants from government of about S$8.8 million that it received from landlords to its stall tenants.
On the other hand, Koufu received about S$1.9 million for wage support from the government. As a result, despite taking a substantial hit, Koufu's net profit remained positive.
The brunt of the COVID-19 impact was borne in 1HFY20, during the circuit breaker period when Koufu saw significantly lower footfall, which led to suspension of operations of some outlets. Comparing 2HFY20 to 1HFY20, Koufu saw a 16.2% increase in revenue and 2.9x increase in net profit.
We expect the recovery to continue going forward as operations resume, although it will be met with uneven recovery across locations.
Koufu’s completed acquisition of Deli Asia Group (Deli Asia, DeliSnacks, Dough Culture and Dough Heritage) for $22.04 million in 2020 allowed them to capture the takeaway market. Post acquisition, from the period of 31 July 2020 to 31 December 2020, revenue contribution from Deli Asia was S$5.6 million.

Koufu’s integrated facility, located at Woodlands will comprise a larger central kitchen, its corporate headquarters, training centre and the R&D centre. It serves to expand central procurement, preparation, processing and distribution functions. The new facility will bring the Group’s processing facilities under one roof. The integrated facility can better support all F&B outlets and self-operated F&B stalls. We expect Koufu to enjoy lower rental costs.
It expects a GFA of 20,000 sqm, more than 5 times larger than their current central kitchens and corporate headquarters, with a price tag of S$43.0 million, including renovation costs and capital expenditure. With the facility, Koufu can better provide support for all F&B Outlets and self-operated F&B stalls. 25% of total GFA will be rented out to their stallholders to build their own central kitchen. Koufu will be occupying the remaining 75%.
Once the integrated facility is completed, it will also house the production facilities and warehouse of Deli Asia. This will consolidate its food preparation and processing with Koufu's central kitchens to optimise economies of scale and operating synergies.

Koufu sold off 55% stake in Supertea Indonesia, but is continuing the Master Licensing agreement in order to streamline operations.
In the Philippines, R&B Tea is sold at 122 Shakey’s Pizza and Peri Peri outlets.
Koufu opened one new food court and one R&B Tea kiosk in Macau.
Koufu aims to continue to tap on their network to look for partners to expand their brands overseas, such as R&B Tea into Thailand.

As Singapore exited the circuit breaker after June 2020, dine-out activity has picked up. Restaurant, fast food and food courts are seeing sales rising, inching towards pre-Covid levels, at the expense of food caterers. We expect the F&B sales to continue to improve in 2021 with the vaccine rollout and development. Although dining activity in Singapore is picking up especially in the heartlands, office and tertiary education areas are still taking a hit.
Koufu’s overseas operations face an uneven recovery, with Macau still seeing slow improvements with the absence of tourists.
We believe that Koufu will continue to recover in 2021, seeing that Q2 2020 bore the brunt of the impact of COVID-19. We expect recovery in 2021 due to:
1. the easing of restrictions;
2. consolidation of loss-making outlets and better use of funds for expansion in Singapore and partnerships overseas,
3. synergies from Deli Asia; and
4. scheduled commencement of operations of the integrated facility in Q2 2021 to add kitchen capacity and allows the extension of cloud kitchen concept to other food operators.
We continue to believe that Koufu’s strong balance sheet will help tide them through now and in the future. As at 31 December 2020, Koufu has net cash of S$65.7 million. This makes up 64.9% of net assets.

We maintain a BUY rating on Koufu but lower fair value to S$0.77 (from S$0.80). Our DCF-derived target price translates into a FY21E P/E of 17.9x.
We lower our FY21E earnings estimates as Macau recovery may lag with low tourist traffic, and F&B outlets at Singapore office districts and tertiary education areas are still operating at sub-normal levels. Despite that, we believe that the integrated facility, new outlets and Deli Asia synergies are catalysts for Koufu's share price.
Our target price implies a 17.6% upside to the last traded price.
See Koufu Share Price; Koufu Target Price; Koufu Analyst Reports; Koufu Dividend History; Koufu Announcements; Koufu Latest News.

Fuelled by the pandemic, Singapore’s online F&B sales picked up significantly to account for a record 44.6% of total F&B sales in May 2020 during the circuit breaker period, from 8.1% a year ago. Although there was some easing to 19.9% in December 2020 as Singapore moved to Phase 2 and subsequently to Phase 3, the overall online F&B sales in Singapore is on an uptrend and could be here to stay for good. Koufu has doubled down on efforts to improve its "Koufu Eat" mobile app to facilitate food deliveries. Koufu believes that this will help mitigate the impact from the cap on dine-in group size to no more than eight, and the reduction in seating capacity at eating places.
In addition, Koufu rolled out smart tray return robots, NETS payment terminals across all food courts and started using automated traditional coffee-making machine at some outlets.

Lim Li Jun Tracy SAC Capital Research | Lam Wang Kwan SAC Capital | https://www.saccapital.com.sg/ 2021-03-05

SGX Stock Analyst Report BUY MAINTAIN BUY 0.77 DOWN 0.80