CGS-CIMB Research is keeping its &ldquo add&rdquo recommendation on Koufu with a higher target price of 94 cents, compared to 86 cents previously.

 

In a Dec 14 report, analyst Cezzane See says, &ldquo While we are positive on Koufu&rsquo s longer-term prospects, we think that we were previously too aggressive about FY2020 net margins and the pace of recovery in FY2021-2022. Hence we lower our PBT margins and cut our FY2020/2021/2022 forecasts by 32.1%/18.4%/4.1%.&rdquo

 

This report marks See taking over the coverage on this stock from analysts Ngoh Yi Sin and Caleb Pang previously.

 

In its 3QFY2020 business update, Koufu revealed that revenue showed significant q-o-q improvement, although it has not reached pre-Covid-19 levels. It guided that its 3QFY2020 same-store-sales growth (SSSG) was 20% lower y-o-y over July 1 to Oct 31, compared to. the same period in 2019. This was slightly ahead of Singapore&rsquo s F& B services index, which fell some 27% y-o-y in 3QFY2020.

 

Koufu said that the footfall and revenue at its Singapore food courts and coffee shops (especially those located in the heartlands) as well as the R& B tea kiosks and four of its full-service restaurants saw significant improvements in 3QFY2020. However, footfall at food courts located near offices, downtown areas, tertiary institutions as well as tourist hotspots remains low.

 

In Macau (6% of 1HFY2020 revenue), business operations are still subdued given the reduced number of visitors and travellers.

 

Despite the headwinds, Koufu opened one R& B Tea kiosk and one new foodcourt in Oct-Nov this year and plans to open one quick-service restaurant and two more R& B Tea kiosks in 4QFY2020.

 

It also remains optimistic of its Dough Culture franchise, which acquisition was completed in July. For its integrated facility (IF), the temporary occupation permit (TOP) is now expected to be received in 1QFY2021 and the facility to commence operations by 2QFY2021.

 

&ldquo Despite the weaker FY2020, we like Koufu as we deem it a resilient F& B play for its exposure to Singapore&rsquo s heartlands. Moreover, its strong balance sheet ($72 million net cash at end June 2020) accords it dry powder to weather volatile times and/or to cash in on any potential mergers and acquisitions (M& A)," says See.

PHILLIPCAPITAL on Wednesday initiated coverage on Koufu Group with a " buy" recommendation and a target price of 80 Singapore cents.

 

The stock gained 1.5 cents or 2.2 per cent to close at 68.5 cents on Wednesday with 3.2 million shares changing hands.

 

The brokerage has pegged the food and beverage (F& B) play to a price-to-earnings multiple of 18.5 times' estimated earnings for FY21, which is the sector average.

 

" We view Koufu as best in class with a defensive business model and superior growth profile from its overseas expansion plans and the expansion of their new concepts," wrote senior research analyst Terence Chua in a note.

 

The firm' s new concepts are its R& B Tea bubble tea outlets and its premium vegetarian Elemen restaurants.

 

PhillipCapital pointed to the F& B operator' s historical record of generating positive free cash flow, and forecast strong free cash flow of S$25 million a year from FY20 to FY22.

 

The group also has high return on equity (ROE). Mr Chua has forecasted an ROE of 20.6 per cent for FY21 and 22.3 per cent for FY22.

 

Its " superior" net margin and high profits per outlet compared with the rest of the sector - coupled with the cash flow generation capabilities and defensive earnings - place Koufu well above its peers, he added.

 

Meanwhile, Koufu' s robust balance sheet puts it in good stead to ride out the ongoing coronavirus pandemic as well as to take advantage of mergers and acquisitions to grow, according to the analyst.

 

The Elemen restaurants and Rasapura Masters food court at Marina Bay Sands will continue to be negatively affected by the restrictions on overseas visitors amid the Covid-19 situation.

 

That being said, as more people in Singapore eat out, Koufu will still benefit from the consumption recovery, Mr Chua wrote.

 

" We expect the group' s move into its new integrated facility in Q3 2020 to be a major catalyst as the group accrues cost savings through improved productivity and operational efficiency," he added.

 

Koufu' s upcoming facility along Woodlands Avenue 12 will house a larger central kitchen and expand the central procurement, preparation, processing and distribution functions.

 

There may also potentially be a special dividend arising from the sale of its existing central kitchen properties when the group moves to the new facility, PhillipCapital noted.

 

Koufu owns two central kitchens at 18 and 20 Woodlands Terrace, which can either be sold, with the disposal proceeds distributed to shareholders, or used for future expansion plans.

 

PhillipCapital estimates that a sale of these properties will be priced at around S$10 million, with Koufu realising an S$8 million gain from it. This translates to an additional 1.4 Singapore cents per share in dividends or an additional 2.1 per cent dividend yield.

 

The Koufu group operates food courts, coffee shops, F& B stalls, kiosks, quick-service restaurants, and full-service restaurants.

Earlier plans to deepen bubble tea footprint and offer meatless dining concept in the region are on hold

 

FOOD and beverage (F& B) company Koufu Group plans to focus its energy on homeground expansion this year, now that its planned overseas expansion will have to take a backseat amid the Covid-19 situation.

 

This year has not been easy for the company. Sales at its Singapore restaurants, food courts, and coffee shops fell by " a substantial amount" during the " circuit breaker" , after it temporarily suspended the operations of 10 food courts and five restaurants to cut operating costs.

 

According to Bloomberg data, the consensus estimate for its FY2020 revenue is S$201 million - 16 per cent lower year-on-year. Net profit is expected to decline 31 per cent to S$19.2 million.

 

The stock, which has recovered 24 per cent from its trough in April, is down 12 per cent for the year, finishing at S$0.68 on Tuesday. That still compares favourably with the Straits Times Index, which is down 18 per cent year to date. The stock trades at 13.7 times its historical earnings and has an indicated dividend yield of 4.4 per cent.

 

Pang Lim, Koufu' s founder and CEO, called Covid-19 the biggest challenge he has ever faced in all the 17 years of Koufu' s operation.

 

Earlier plans to deepen its bubble tea footprint in Indonesia and the Philippines, as well as plans to offer its meatless Elemen dining concept in China, Australia, Malaysia and Indonesia, have been placed on the back burner due to continued travel restrictions.

 

" Bringing in any new concept to a new market now will be challenging, but that does not mean we completely throw out the idea of expansion abroad," he told The Business Times in Mandarin in an interview. He added that Koufu will wait until the virus situation has eased before it proceeds.

 

Meanwhile it continues to focus on growing its domestic business.

 

Mr Pang said the decline in footfall during the " circuit breaker" was partially mitigated by an increase in delivery services.

 

Noticing a change in consumption patterns among diners, the group has doubled down on efforts to improve its " Koufu Eat" mobile app to facilitate food deliveries. It believes that this will also help to soften the impact on dine-in numbers now that seating capacity at its eateries is reduced. About 70 to 80 per cent of its stall tenants are already on the app.

 

Since Phase 2 began in mid-June, sales have rebounded. But they remain below pre-Covid-19 levels.

 

Koufu is also growing its coffee shop and food court footprint in Singapore, particularly in hospitals, commercial malls, tertiary institutions and new housing estates. About two-thirds of its outlets are located in heartland areas and made up about about 70 per cent of Koufu' s FY2019 revenue.

 

The group opened two coffee shops at Tampines and Compassvale Drive this year, and plans to open at least one more at Le Quest condominium at Bukit Batok.

 

As business activity has slowed, Mr Pang said that government tenders for coffee shops and food courts have slowed as well. According to a June CGS-CIMB report, an average of 10 to 12 new sites are put up for bidding yearly by the Housing and Development Board. Up to 20 may be available in a good year. Koufu' s track record and competitive pricing has enabled it to enjoy a higher win rate than its peers, said the report.

 

Mr Pang said that as a Singapore business, it has always been Koufu' s strategy to deepen its roots in its homeground. " But given the difficulties that the F& B sector is facing, we will proceed very cautiously in our assessment of these opportunities . . . Every outlet we open and every acquisition we make has to fit in with our long-term business development plan," he added.

 

Koufu this month announced the acquisition of Deli Asia and three other companies that collectively make up its biggest suppliers of fried food and dough products.

 

Mr Pang said the deal made perfect sense because Koufu has the presence in Singapore to distribute its fried food and dough products to a wider market. As at end-December last year, Koufu ran 72 self-operated F& B stalls, 27 F& B kiosks, seven quick-service restaurants and four full-service restaurants here.

 

Koufu intends to integrate production of these products into its new 20,000 sqm headquarters building, which is targeted for completion by the end of this year, barring further construction delays.

 

The new seven-storey integrated facility in Woodlands will house a larger central kitchen, a research and development centre to develop new recipes and analyse market trends, as well as smaller central kitchen units that will be rented out to chain stall operators to support their growth. This will also generate recurring rental income for the group.

 

Asked whether Koufu is eyeing any other targets amid talk of continued industry consolidation in Singapore' s F& B industry, Mr Pang said the company will focus on stabilising and integrating its new acquisitions first, as well as ensure it can value-add to these businesses, before it looks at other deals.

 

In spite of the effects of the pandemic, the company still aims to reinvest half of its net profit back into the business. The other half is intended for distribution as dividends.

 

Analysts continue to like Koufu because of its stable cash flow, strong balance sheet, and focus on the mass market segment. They also expect Koufu to remain profitable, thanks to the government' s Job Support Scheme and foreign worker levy waiver, as well as rental relief from its landlords.

 

Mr Pang is not beaten down either, saying: " The crisis won' t last forever it will pass. So what we are doing now is to prepare for the future, so that when the pandemic is finally over, we can swifty return to our growth trajectory."

THE proposed S$22 million acquisition of the Deli Asia group by food court and coffee shop operator Koufu Group is an " attractive" deal that could boost the mainboard-listed company' s earnings per share, a CGS-CIMB report said on Wednesday.

 

The Deli Asia group - comprising Deli Asia, Delisnacks, Dough Culture and Dough Heritage - is one of Koufu' s biggest suppliers of fried food and dough products.

 

Analyst Ngoh Yi Sin expects the deal to be completed by the end of this month, subject to the fulfilment of all conditions and undertakings. Assuming the deal is completed by end-July, she forecast a 5 per cent upside to CGS-CIMB' s estimate of Koufu' s earnings per share for FY20, and an 8 per cent upside to the FY21 estimate.

 

Ms Ngoh also noted that the Deli Asia group recorded a S$2.8 million profit before tax, and a net profit of S$2.4 million in FY19. " At 9.2 times the implied FY19 P/E, we think this is an attractive acquisition," she said.

 

Ms Ngoh added that the proposed acquisition will complement Koufu' s product offering and strengthen its supply chain. Further synergies can be reaped from the consolidation of manufacturing facilities and potential expansion of distribution channels, she said.

 

She expects Koufu to reap rental cost savings from the planned relocation of Deli Asia group' s production facilities and warehouse into Koufu' s upcoming integrated facility later this year.

 

The proposed acquisition aside, CGS-CIMB continues to like the stock for its earnings growth, net cash position (S$85.7 million as at end-FY19) and cash-generative business, Ms Ngoh said.

 

CGS-CIMB on Thursday reiterated its " add" call on Koufu, and maintained its target price of 86 Singapore cents. The target price is based on a 19 times estimated FY21 price to earnings ratio, which is at a 15 per cent discount to the sector average of 22 times, Ms Ngoh said.

 

The stock offers a 3 per cent dividend yield, and currently trades at 15.2 times its estimated FY21 price to earnings ratio (P/E), making it " one of the cheapest F& B players in the region" , she added.

 

KOUFU Group has proposed to acquire Deli Asia, Delisnacks, Dough Culture and Dough Heritage for about S$22 million.

 

The four companies make up the Deli Asia group, one of Koufu' s biggest suppliers of fried food and dough products, said the mainboard-listed firm, which operates and manages food courts, coffee shops and a mall.

 

The Koufu group will fund the purchase price using its internal resources, including net proceeds received from the company' s initial public offering.

 

Founded by Alex Ong and his wife Irene Lee, the Deli Asia group supplies frozen and partially fried food products to restaurants and food and beverage (F& B) stalls at food courts, coffee shops and hawker centres.

 

It also licenses its Delisnacks brand to about 60 franchised stallholders at hawker centres and coffee shops that sell its food products at their stalls.

 

In addition, under its Dough Culture brand, the group operates seven retail kiosks in Singapore at locations including suburban malls. These kiosks sell fried food and dough products such as banana fritters and related products such as Chinese desserts and drinks, directly to consumers.

 

Koufu will become the sole shareholder of each of the four target companies upon completion of the proposed acquisition.

 

Meanwhile, Ms Lee and Doreen Ong - two of the three existing shareholders of Deli Asia group - have signed a one-year service agreement with Koufu to join the group as company advisers when the acquisition is completed. Thereafter, they will continue to provide consultancy services to Koufu for one year.

 

Ms Lee and Ms Ong each have more than 25 years of experience in the F& B industry. The proposed deal will thus allow Koufu to " tap into the expertise and experience of the vendors" , it said.

 

The four target companies' business has been resilient during Singapore' s " circuit breaker" as they cater predominantly to a mass consumer takeaway market, Koufu added.

 

The Deli Asia group has production facilities and a warehouse in Singapore that " drive high productivity" in the manufacturing and storage of fried and partially fried food and dough products, Koufu said. These products are also highly complementary to the range of dim sum items Koufu is selling at F& B stalls in its food courts and coffee shops.

 

" Based on the complementary products and manufacturing processes of the target group, the proposed acquisition will provide important synergistic effects for Koufu, and will broaden Koufu' s organic manufacturing capabilities, inject intellectual know-how to increase productivity within its existing food production and storage processes, and strengthen the security of its supply chain," Koufu said.

 

The proposed deal will also enable the mainboard-listed group to accelerate its business expansion plan and diversify its income streams, as well as improve its resilience towards future shocks and economic uncertainties, Koufu added.

 

Koufu said the " timely" acquisition will allow it to immediately use the Deli Asia group' s production facilities for its fried food and dough products before the expected completion of Koufu' s new headquarters and integrated facility this year.

 

Once the integrated facility is completed, Koufu plans to gradually shift the target group' s production facilities and warehouse there.

 

This is to consolidate the Deli Asia group' s food preparation and processing with Koufu&rsquo s own central kitchens to optimise economies of scale and operating synergies.

 

Koufu said the consolidation of its ordering, production, product research and development and distribution processes was a key driver in the investment in the new headquarters and integrated facility.

 

Koufu chief executive Pang Lim said the " synergistic and accretive" proposed acquisition will be in line with the company' s vertical integration strategy, and help Koufu develop its supply chain of " well-loved oriental favourites" sold at its food courts, coffee shops and quick-service restaurants.

 

" This will add a greater variety of quality choices to our dim sum, bakery and confectionery items for all our consumers," Mr Pang said.

 

In terms of creating new revenue streams, the proposed deal will give Koufu immediate access to third-party businesses locally and overseas, as well as provide opportunities to expand the F& B retail business to include the supply of frozen and partial fried food products to supermarkets and export markets.

 

In addition, Koufu intends to expand the network of retail kiosks under the Dough Culture brand from the current seven to at least 20 in the next five years, Mr Pang said.

 

Deli Asia founder Mr Ong said he believes Koufu, as an established F& B player, " can take the brands further and bring the business to an all-new level, with our combined expertise, network and manufacturing capabilities" .

 

The latest available unaudited net tangible asset value attributable to the shares of the four target companies was S$7.1 million as at April 30, 2020.