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CGS International trims Kimly's target price to 34 cents given limited scope for cost pass through

The Edge Singapore
The Edge Singapore  • 3 min read
CGS International trims Kimly's target price to 34 cents given limited scope for cost pass through
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CGS International analysts have reiterated their "hold" call on Kimly 1D0 -

. Given limited prospects for earnings growth given cost pressures, analysts Kenneth Tan and Ong Khang Chuen have trimmed their target price to 34 cents from 36 cents.

On May 9, Kimly, which operates a chain of coffeeshops, reported core earnings of $16 million for its 1HFY2024 ended March, down 1% y-o-y. Revenue in the same period was up slightly by 2% y-o-y to $158.5 million

The slight miss to the projections of Tan and Ong can be attributed to higher-than-expected labour costs, which increased by 6% y-o-y, causing an EBIT margin decline of 2.1% pts yoy. 

Despite the lower earnings, Kimly has declared a higher interim dividend of 1 cent per share, versus 0.56 cent paid for 1HFY2023. At this level, it is a "decent" annualise FY2024 payout of 6.7%. 

Ong and Tan point out that Kimly may find it tough to just pass through higher costs.

For its outlet management business segment, Kimly is compelled to keep rental hikes to a minimum to maintain healthy tenant occupancy, they figure.

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Food retail, Kimly's other main business segment, similarly faces "tougher cost pass-through" as most of them are serving cost-conscious mass market F&B consumers.

"We believe such challenges are likely to persist in FY2024 and the coming FY2025 as we see limited scope for Kimly to effectively hike prices further," the analysts say.

In 1HFY2024, Kimly opened two new outlets but closed one, for a net increase of one.

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The analysts, citing Kimly's management, is aiming to open between three and five new outlets this year.

Tan and Ong believe this target is achievable given that Kimly's net cash remains healthy.

"However, we do see risks of potential outlet closures, as excessive rental hikes from private landlords could result in Kimly rationalising its lower-margin outlets, in our view," they suggest.

Ong and Tan, having lowered their operating margin assumptions, have derived lower earnings for FY2024 to FY2026 by 2 - 4%, resulting in the new target price of 34 cents, which is still based on the same valuation multiple of 13x FY2025, which is 1 sd below Kimly's own 5-year mean.

Possible upsides to the analysts' current view include a quick recovery in outlet growth, strong demand for mass market fare from increased downtrading behaviour and easing labour cost pressures. 

On the other hand, downside risks span from accelerated outlet closures and prolonged margin pressure from the inability to pass on higher opex.

Kimly shares changed hands at 32 cents as at 4.08 pm, up1.61%. 

 

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