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The ASC Controversy – Time to Exit Kimly Limited or Remain Vested

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The recent Asian Story Corporation (ASC) controversy involving suspected breaches of duties by certain directors at Kimly. The coffeeshop chain by right, should have a business model that is easily understandable given that it is homegrown. Coffee shops in Singapore are also generally known to be the most common haunts for most locals. With the lack of visibility to the future of Kimly post-ASC controversy, the recent arrest of two main directors of the Company caused shareholders to turn reactionary and bail out of the counter.

Severity Of The Controversy

In order to understand what really happened let us review the chain of events that led to the latest controversy.

news

 

Source: The Business Times (06 December 2018)

The key executives at Kimly that are involved in the controversy include the two key figures, executive chairman Lim Hee Liat, and executive director Chia Cher Khiang. Asian Story Corporation (ASC) is a drinks company founded in 2009 by an individual named Wang Chia Ye and its audited full-year 2017 showed earnings before income tax, minority interests and extraordinary items stood at S$1.2 million.

Another non-executive that is involved in the ASC controversy is former Pokka International chief executive Alain Ong Eng Sing. He held the Kimly non-executive directorship from 15 February 2017 till January 2018. In March 2017 Initial Public Offer (IPO) prospectus, Alain Ong was allocated 5.1 million shares and his wife and Mediacorp artiste Vivian Lai. The latter was Pokka’s ambassador for several years before ending the contract this year.

The arrest of Mr. Lim Hee Liat and Mr. Chia Cher Khiang has resulted in a new level of heightened scrutiny of the Company’s future and overall fundamentals. Both directors were suspected of being involved in an offence under Section 199 of the Securities and Futures Act (SFA), which pertains to false or misleading statements. A criminal breach under this section carries a prescribed punishment of a fine not exceeding $250,000 or imprisonment not exceeding seven years, or both.

As both Mr. Lim and Mr. Chia are the only two key executives on Kimly’s board, they have a lot of influence on the Company’s overall business strategies, and operations.

How Are The Financials?

chart

 

Source: Phillip Securities Pte Ltd (07 December 2018)

The ASC controversy has caused the counter to drop dramatically from the range $0.27-$0.30 before the news broke to the current price of $0.225 as of market close on 08 December 2018, below the IPO price of $0.25. With this sharp decline in the stock price, investors might want to take a step back temporarily to assess the financial health of the company.

In the latest full-year results ending 30 September 2018, total revenue rose 5.3 percent year-over-year (YoY) to $202.2 million, while profits attributable to equity holders rose 2.1 percent YoY to $21.9 million in FY18. A snapshot of the latest earnings results is as follows:

earnings

 

Source: Company Earnings Report

The Company does not have any significant interest-bearing debt on its latest balance sheet, and cash and cash equivalents on hand stood at S$71.67 million as of 30 September 2018.

Net cash flow from operations (net CFO) during FY18 fell to S$7.2 million from $29 million in FY17 after adjusting for interest and income taxes. The drop in the CFO could be related to the large increase in cash outflows from trade and other receivables of $17.8 million in FY18 from $2.6 million in FY17. These figures are shown in the two yellow boxes in the snapshot of the cash flow statement shown below:

cashflow

 

Source: Company earnings report

Balance sheet wise, we noticed that the Accounts Receivable (AR) balances rose to $17.9 million as of 30 September 2018 from $5 million in 30 September 2017. This is about a four-fold increase in AR in the one-year period.

If we were to compare this to its closest peer, Koufu Group, we noticed that its AR balances as of 30 September 2018 rose slightly to $11.7 million from $10.7 million in the previous year, and turnover for the nine months ending 30 September 2018 was $166.8 million as compared to $162.5 million during the same period last year.

Although it will not be fair to compare both companies due to the differences in market capitalisation values ($344.2 million for Koufu, and $259.92 million for Kimly), both companies operate in a similar industry which comprise of mostly foodcourt and coffee shop outlets.

As both have relatively similar business models, the sharp jump in AR balances in Kimly does place some caution over whether there could be implications of a significant working capital shortfall in the future if the management of AR balances is somehow seen lacking.

Discounted Cash Flow (DCF) Valuation for Kimly Limited

To analyse closely the fundamentals of Kimly using discounted cash flow (DCF) valuation technique, assuming zero percent growth rate for the next five years from FY18, and terminal growth rate of zero percent at the end of five years in 2024. We have also assumed a zero-beta given the unavailable information. The valuation assumptions are shown in the following charts shown below:

DCF              
All figures are in S$’000, unless otherwise stated              
 

2018A

2019F 2020F 2021F 2022F 2023F 2024F
PAT             21,883     22,219     22,219     22,219     22,219        22,219      22,219
YoY Growth (%)   1.5% 0.0% 0.0% 0.0% 0.0% 0.0%
Adjustment to Free Cash Flows             (1,258)     (1,601)     (1,601)     (1,601)     (1,601)        (1,601)      (1,601)
Free Cash Flow (PAT + Adj. to FCF)             20,625     20,618

    20,618

    20,618     20,618        20,618      20,618
Terminal Value                931,270  
FCF             20,625

    20,618

    20,618     20,618     20,618      951,889  
YoY Growth (%)   0.0% 0.0% 0.0% 0.0% 0.0%  
NPV           931,270            
Less: Debt                    –            
Plus: Cash and Cash Equivalents             71,669            
FCF due to shareholders (S$)   1,002,939.38            
Weighted average shares outstanding        1,157,272            
FCF per share ($/share) 0.87      

 

Source: Company reports, own estimates

DCF Valuation Assumptions

Assumptions  
Risk-free rate 2.2%
Beta N/A
Market Return 10.0%
Cost of Equity 2.2%
Cost of Debt 0.0%
Tax Rate 17.0%
WACC 2.2%
Terminal growth rate 0.0%

Source: Company reports, own estimates

Our DCF per share estimate works out to be $0.87. If we were to include a drastic 50.0 percent discount off the DCF value per share to account for the risks associated with ASC fallout, this works to be approximately $0.435. This could mean that the current stock price of S$0.225 is relatively undervalued as compared to the DCF estimate price.

Peer Comparisons

Company Name P/E Dividend Yield (%) P/BV Market Capitalisation (S$’millions) Total Revenue (S$’millions)
Kimly Limited                    12.265 4.27%                      3.110 259.92 202.21
Koufu Group Limited                    12.738 1.61%                      3.840 344.20 225.50
Breadtalk Group Limited                    42.136 1.71%                      2.792 492.87 605.28

Source: SGX Stockfacts (07 December 2018)

Based on the comparison table shown above, we noticed that both Kimly and Koufu have close valuations in areas such as price-to-earnings (P/E), price-to-book (P/B) multiples, market capitalisation values, and total revenues. However, when compared to Kimly, Koufu Group is not experiencing any going legal proceedings.

Bail Out Of Kimly Stock?

Based on the DCF estimate of Kimly Limited, the current share price of $0.225 appears undervalued, after taking into account a 50 percent haircut to the estimated fair price of $0.87 to account for the potential long drawn out legal fallouts arising from the ASC controversy.

However, we would like to highlight a potential rise in the account receivable balances and the potential implications of a working capital shortfall. In addition, the arrests of its top executives pose a significant risk to its future operations should the company fail to replace their positions with capable candidates.

Shares Investment is not a financial advisory firm licensed by the Monetary Authority of Singapore. The above article entails some arithmetic guesswork, solely to express the writer’s own opinion on the stock and its current valuation. We do not make any trading calls and readers should consult with their own financial advisors before making any investment decisions. 

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