PhillipCapital is initiating a “buy” call on food court operator Koufu with a target price of 80 cents.
In an Aug 5 report, analyst Terence Chua views Koufu as best in class with a defensive business model and superior growth profile from their overseas expansion plans and the expansion of their new concepts (R&B Tea and their premium vegetarian Elemen restaurants).
Although given the current economic climate, Koufu is expected to be more cautious with store openings for FY20 and FY21. Koufu opened one new R&B tea kiosk (Eastpoint Mall) and two coffee shops (Blk 602 Tampines Avenue 9 and Blk 215C Compassvale Drive) in the first quarter of 2020. For the rest of 2020, the opening of two new food courts and two new R&B tea kiosks initially slated for opening in the second quarter of 2020 has been moved back to the third quarter of 2020 tentatively.
“We like their historical record of generating positive free cash flow and forecast the Group to generate strong free cash flow of $25 million a year from FY20 to FY22. Their strong balance sheet (FY19 net cash of $86 million or 15 cents per share) puts them in good stead to ride out the current crisis as well as to take advantage of M&A activities to grow,” Chua adds.
Meanwhile, Koufu’s new integrated facility (IF) is set to begin operations in 3Q20. This IF will house a larger central kitchen and expand the Group’s central procurement, preparation, processing and distribution functions.
This is expected to improve its overall productivity and operational efficiency, while delivering cost savings and additional revenue. With a gross floor area (GFA) of 20,000 sqm, this is more than five times larger than their current central kitchens and corporate headquarters.
Once Koufu moves into its new IF, Chua believes that the company may divest its existing two central kitchens at 18 and 20 Woodlands Terrace, which proceeds could be distributed to shareholders as a special dividend. If not, Koufu may keep the two central kitchens and use them for future expansion plans.
Nonetheless, the analyst estimates the sale of these properties to be around $10 million with the group realising an $8 million gain from this. This translates to an additional 1.4 cents or an additional 2.1% dividend yield.
On the outlook, Chua remains positive on the stock and sees that the recovery in consumption post circuit breaker will be a huge positive. He is most positive on Koufu’s expansion in the mass-market segment – with a price range between $20 to $50 - as this segment has seen the highest growth.
“The recent economic slowdown in our view will fuel more consumers to switch from the high-end market segment to the mass-market segment, benefitting mass-market operators such as Koufu,” adds Chua.
The stock is also preferred for its strong cash flow generation, defensive balance sheet and high FY21 and FY22 return on equity (ROE) of 20.6% and 22.3% respectively. These factors place Koufu well about its peers.
“We expect Koufu to remain profitable for FY20 and generate cash flows of about $25 million every year, which will support their dividend payout,” says Chua.
Koufu says that it will be releasing its 1H20 results on Aug 10.
As at 11.50am, shares in Koufu are trading at 68 cents or 24 times FY20 earnings with a dividend yield of 2.1%.
