CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan have initiated “add” on Kimly with a target price of 46 cents, representing a 20.0% upside to the counter’s last-closed price of 38 cents.
The group, which was established in 1990, is the largest coffeeshop operator in Singapore. It was listed on the Catalist board of the SGX-ST in March 2017.
In their report dated June 21, Ong and Tan have also forecast a two-year core earnings per share (EPS) compound annual growth rate (CAGR) of 47% in from FY2020 to FY2022.
This, say the analysts, is due to positive tailwinds from continued work-from-home initiatives, higher popularity on food delivery services, as well as earnings contribution from Tenderfresh, which was 75% acquired on May 11.
Kimly’s coffeeshops are also mostly located within the heartlands, which enjoy a high concentration of public housing.
See also: Kimly more than doubles 1H21 earnings to $22 mil, declares interim DPS of 0.56 cents
Its focus on the mass segment offers it greater stability for its topline, especially in terms of economic uncertainty.
“We believe Kimly’s food retail segment can benefit from structurally higher same-store-sales with increasing work-from-home arrangements in the new norm,” write the analysts.
As Singapore transitions to a new normal, where more hybrid working arrangements will take place in future, this could be positive for Kimly as more individuals working from home could mean more patrons to heartland coffeeshops for meals, say Ong and Tan.
On this, the analysts have identified Kimly as their top pick within the SGX-listed food and beverage (F&B) sector due to its focus on the mass market, giving it a more defensive earnings profile.
As at end-FY2020, the group operated 72 coffeeshop outlets, which is notably higher than its competitors, and 29 more than its nearest competitor, Broadway.
The group has also boosted its digitalisation efforts by engaging more third-party delivery platforms such as GrabFood and Deliveroo.
As at end-FY2020, Kimly had over 125 food stalls offering food delivery services compared to 66 stalls before the circuit breaker (CB) period from April to June 2020.
“We expect the demand for Kimly’s online food delivery services to continue growing meaningfully in FY21F/22F amid shifting consumer preferences and continued WFH arrangements among companies. We estimate that online food delivery can contribute 10% of Kimly’s overall topline by end-FY2022,” write the analysts.
The group has also been acquiring food outlets to accelerate its expansion, which serves to reduce uncertainties from having to deal with private lessors. This, in turn, helps the group ensure longer-term sustainability of its outlets.
For the FY2021 to FY2023, Ong and Tan say they expect Kimly to grow the number of coffeeshops under management by three to five outlets per year.
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In addition, Ong and Tan are positive on Kimly’s acquisition of Tenderfresh, as it allows the group to tap into the halal F&B market in Singapore.
The acquisition will enable the group to enhance its presence in the quick service restaurant segment as well as open up new revenue sources in the form of B2B food production for OEM customers.
“In the medium term, there is also a possibility of Kimly expanding its halal F&B operations into other Southeast Asian countries. We expect the acquisition to be completed by Oct 2021, and estimate the acquisition to contribute $5.4 million net profit to Kimly in FY2022,” they write.
“We value Kimly using a price-to-earnings (P/E) based valuation as we believe this allows us to incorporate near-term catalysts and risks. The group currently trades at 14 times FY2022 P/E, close to its 5-year average (vs. 25 times at IPO),” say Ong and Tan.
“Our target price of 46 cents is pegged to 16.8 times FY2022 P/E, or 0.5 standard deviation (s.d.) above Kimly’s average P/E since IPO in March 2017. We believe Kimly should trade 0.5 s.d. above its 5-year average in view of the group’s favourable growth prospects. This represents 20% upside to the group’s current share price,” they add.
The group’s valuation is also cheaper compared to its peers, with a stronger dividend.
As at 1.44pm, shares in Kimly are trading 1 cent higher or 2.6% up at 39 cents or 3.75 times P/B, according to CGS-CIMB’s estimates.
Photo: Kimly
