UOB Kay Hian is downgrading its call on coffeeshop operator Kimly to “hold” from “buy” previously, with a higher target price of 41 cents from 36 cents previously.
This came on the back of the group recording a 13.2% y-o-y increase in revenue to record S$238.6 million for the full year ended September 30, 2021 (FY2021), mainly due to revenue growth from all three of its Business Divisions. These comprise food retail, outlet management, and outlet investment business. Kimly also registered net profit after tax of $39.3 million for FY2021, an increase of 55.7% y-o-y.
See: Kimly's FY2021 net profit surges by 55.7%
According to analysts Llelleythan Tan and John Cheong in a Dec 15 report, the substantial growth in net profit was largely due to a full year contribution of Job Support Scheme (JSS) savings and rental rebates. Excluding the $15.8 million JSS savings and rental rebates obtained, FY2021 net profit would have dropped by 5.9% y-o-y.
Kimly declared a final dividend of 0.84 cents and a special dividend of 0.6 cents, equating to a FY2021 full-year dividend of 2 cents (FY2020: 1.12 cents) and dividend payout ratio of 62.5% (FY2020: 52.6%).
FY2021 revenue from the outlet management segment grew by 8.8% y-o-y due to contributions from three newly opened coffee shops and improved footfall in FY2021. Revenue from the food retail segment increased by 14.4% y-o-y as higher contributions from existing stalls, larger adoption of food delivery and six newly opened food stalls in FY2021 contributed to the solid growth in revenue. The new outlet investment segment recorded $6.8 million revenue in FY2021, more than doubling FY2020’s $3.1 million revenue.
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Total number of food outlets (+2 y-o-y) and food retail stalls (+2 y-o-y) increased to 85 and 148 respectively. “We expect Kimly to increase its outlets and stalls by 3-4 each per year,” says Tan and Cheong.
Due to its strong cash generative business, Kimly maintained its strong balance sheet and net cash position of $70.6 million for FY2021. Armed with such a robust balance sheet, Kimly has consistently kept its policy of paying out more than 50% of annual earnings, which the analysts believe would imply a decent dividend yield of 3-4% going forward.
Furthermore, management is still on the lookout for M&A opportunities as Kimly seeks to expand its coffee shop portfolio. This has resulted in the $54 million acquisition of a 75% stake in Tenderfresh Group (Tenderfresh) in 2HFY2021.
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“We reckon this synergistic acquisition would be beneficial for Kimly as it helps diversify the group’s revenue streams while allowing the group to leverage on Tenderfresh’s competitive advantage to penetrate Singapore’s growing Halal F&B market,” says Tan and Cheong.
“Furthermore, new food concepts from Tenderfresh could help increase and improve Kimly’s existing food items and concepts, potentially creating new revenue streams. Based on our estimates, we reckon that the Tenderfresh acquisition would boost Kimly’s FY2022 net profit by $4-5 million,” adds the analysts.
Currently trading at +1SD of its average mean PE, Tan and Cheong opine that the market has not taken into account the upcoming profit loss from the absence of JSS savings and rental rebates. Although the Tenderfresh acquisition has softened the hit on earnings, they reckon that potential upside is capped at current price levels, barring any new acquisitions. Key re-rating catalysts would be future major earnings accretive acquisitions.
As at 12.00pm, shares in Kimly are trading at 40 cents or 16.0 times FY2022 earnings with a dividend yield of 3.2 times.
