SINGAPORE (June 16): RHB Group Research is upgrading its recommendation on coffeeshop owner and operator Kimly to “buy” from “neutral” with a higher target price of 26 cents from 24 cents previously. The new target price represents a 13% upside for the stock.
In a Friday report, lead analyst Jarick Seet says, “We think that most of the bad news for Kimly has already been priced in, and valuation at this level seems attractive, being a cash generative and defensive business.”
As Singapore sees more businesses open up in Phase 2, Kimly is expected to benefit from the larger crowds going outdoors.
Also, the company’s acquisition of four coffee shops, three industrial canteens and a restaurant unit, should contribute positively to its PATMI. Despite the impact of Covid-19 in F&B business, the company’s defensive qualities are likely to enable it to still enjoy PATMI growth over the next few years.
Meanwhile, Kimly is announced a strategic shift to acquire more long-term and direct assets ownership of food outlets and food stalls to increase its revenue stream and reduce risks associated with leasing and tenancy.
The management is also streamlining outlet operations and further optimising its central kitchen to improve profitability. To enhance front-end outlet efficiency, it has commenced several enhancements and work process improvements at its central kitchen.
The central kitchen typically prepares marinated meat products which are supplied to “mixed rice” stalls. But now, it is also preparing sliced meat and semi-finished food products for its seafood zi char stalls. Centralisation simplifies food preparation at the stall front, and accordingly, reduces labour hours and skill required.
Despite expecting a weaker 2H20 due to the circuit breaker, Seet still remains positive on Kimly’s prospects as Singapore has entered Phase 2, and will eventually move to Phase 3, where things should eventually normalise.
“We expect Kimly’s business to remain durable amidst this pandemic, and it will likely continue to reward shareholders with attractive dividends despite falling slightly for FY20F (Sep) of 4.7%. We expect dividends to pick up over the next few years as things return to normal for the company post circuit breaker,” adds Seet.
As at 12.25pm, shares in Kimly are trading at 22 cents or 2.6 times FY20 book with a dividend yield of 4.8%.
