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SI Research: Profited From Our Call On Koufu Group?

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These days, it is extremely tough being a food and beverage (F&B) vendor in Singapore due to increasing rental, labour and raw materials cost pressures. In this cut-throat environment, turnaround of stallholders are rife, resulting in lesser visibility and operational uncertainty.  

Despite the highly competitive and challenging F&B environment, the operator and manager of food courts and coffee shops – Koufu Group (Koufu) reported a rather solid 1Q19 and had recently been receiving rather positive recommendations from the street.  

Defensive Earnings 

The top line grew at a compounded annual growth rate (CAGR) of four percent to $223.8 million in FY18. In 1Q19, revenue continued to increase 4.9 percent to $57.8 million, boosted by a 9.2 percent and 0.7 percent growth in revenue for Outlet and Mall Management and F&B Retail segments, respectively, to $29.7 million and $28.1 million. 

The revenue growth was mainly driven by the contribution from renovated Marina Bay Sands Foodcourt – Rasapura Masters which underwent temporary closure from April to July 2018, two new food courts in the Woodgrove and Buangkok Square as well as six new R&B Tea kiosks (five in Singapore and one in Macau).  

In line with higher top-line performance, operating expenses grew 2.6 percent to $50.5 million mainly due to higher staff costs and administrative expenses led by new outlets. As operating expenses held steady, net profit improved 12.3 percent to $7 million and net margin expanded 79 basis points from 11.3 percent to 12.1 percent. 

Pipeline Openings

Going forward, more new outlets are on the way. Koufu will add three food courts at 164 Kallang Way (FY19), LeQuest (FY20) and Macau University (FY19), one coffee shop at Block 289C Compassvale Crescent (FY19), one Elemen restaurant at Paya Lebar Quarter (FY19) and five more R&B Tea outlets (FY19). 

In line with its plans to enter new geographical markets for growth, Koufu had on 4 July 2019 entered into a joint venture (JV) agreement to expand the Supertea and R&B Tea brands into Indonesia, with an initial focus on Jakarta’s Grade A malls. The group will have an effective 32.4 percent stake in the JV and will open its first Supertea outlet in the next couple of months. Meanwhile, Koufu also has set its sights to expand the Elemen brands to Indonesia. In addition, Koufu is now in active talks to expand R&B Tea and Supertea in other markets such as Malaysia and the Philippines. 

We opine that Koufu may face headwinds in Singapore owing to limited expansion space. It is likely to incur start-up costs that could put a drag on its balance sheet notwithstanding its healthy cash position. While it may have control over the supply of essential food and ingredients in its overseas ventures, the 32.4%-minority stake in its Supertea and R&B Tea brands in Indonesia does raise some concern,

On the other hand, the proposed 7-storey integrated facility in Woodlands Avenue 12 which has an estimated gross floor area of 20,000 square meters is currently under construction and is expected to be completed by 1H20. The five times larger central kitchen will allow Koufu to better support and cater to future business expansion needs. 

Growing Cash Hoard

Nonetheless, we like Koufu’s strong and unburdened balance sheet in particular. Koufu’s cash generation remained strong with $25.8 million in net cash generated from operating activities. Correspondingly, its strong cash flow generation ability helped Koufu to build a significant cash hoard of $66.6 million as at 31 March 2019, this translated to a net increase in cash and cash equivalents of $5.6 million in the quarter.

Despite the rollout of new outlets, Koufu maintains a low debt level at just $4.6 million. With a cash pool of $66.6 million, the group sits on a net cash position of $61.9 million or $0.11 per share. Its strong net cash position endows it with the ability to seek out potential growth opportunities when they arise. Furthermore, the group’s debt-to-equity ratio also stood insignificantly at 0.05 times!

Undemanding Valuations

Name Market Cap ($m) P/E Ratio Dividend Yield (%) P/B Ratio
Breadtalk 405.9 32.8 2.1 3.3
Kimly 277.9 13.4 5.2 3.2
Koufu Group 416.4 15.8 2.9 4.4
Jumbo Group 250.3 20.7 3.1 3.7
ABR Hldgs 140.7 58.3 3.6 1.5
Japan Foods Hldgs 83.7 25.0 4.0 2.5
No Signboard Hldgs 28.2 1.3
RE&S Hldgs 62.3 14.4 2.3 1.7
Tung Lok 45.3 3.0
Katrina Group 38.2 88.7 1.6 2.7
Soup Restaurant Group 50.5 23.4 3.8 4.1
Sakae Hldgs 12.8 3.5 0.3
Pavillon Hldgs 5.8 0.2
Average 21.2 2.0 2.3

Source: Singapore Exchange, as of 31 July 2019 

Based on its current market price of $0.74, Koufu is trading at price-to-earnings (P/E) ratio of 15.8 times. Koufu is considered to be relatively undervalued when compared to its SGX-listed  peers of 21.2 times. However, stripping away net cash of $0.11 per share from its share price, P/E ex-cash would be only at 13.4 times. 

Since we wrote about this stock last year, the share price has appreciated from $0.625 to as high as $0.815 in March 2019. The price has corrected to a lower $0.74 as at 1 August 2019. Much lies in Koufu’s ability to execute its regional expansion plans before we will jump back into the stock. We are watching this stock very closely.

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