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RHB ‘neutral’ on downstream F&B sector, notes recovery past pre-pandemic levels

Douglas Toh
Douglas Toh • 3 min read
RHB ‘neutral’ on downstream F&B sector, notes recovery past pre-pandemic levels
Kimly looks to benefit from the issuance of $250 worth of CDC vouchers from the government. Photo: Albert Chua/ The Edge Singapore
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RHB Bank Singapore analyst Alfie Yeo has a “neutral” rating on Singapore’s downstream food and beverage (F&B) sector, with a “buy” call on Kimly 1D0 -

and a “neutral” call on Japan Foods at target prices of 38 cents and 30 cents respectively.

“Kimly is our sector top pick with valuation at close to -1 standard deviation (s.d.) of its mean price-to-equity ratio (P/E) and growth led by outlet expansion. We are cautious on Japan Food’s FY2025’s ending April 30 profit outlook, on the back of elevated operating costs,” writes Yeo.

In his Jan 18 report, Yeo notes that the F&B Foodservice Index has recovered past pre-pandemic levels.

The analyst attributes this to the relaxation of Covid-19 safety measures, and the subsequent recovered activity in cafes, food courts and “other eating places” due to affordability and exposure to mass market consumers.

He adds: “We expect stronger consumption is on the cards, with our economics desk estimating Singapore’s 2024 gross domestic product (GDP) growth forecast at 3% from 1.5% in 2023 – driven by an improving external environment.”

“This should translate into more positive consumption and income from the workforce eventually, as domestic industries recover and benefit from a more robust global demand,” continues the analyst.

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Meanwhile, both Japan Foods and Kimly have been concentrating on their respective halal segments.

Japan Food’s halal brands include Yakiniku Shokudo, which specialises in barbecue, and Tokyo Shokudo, which serves halal ramen, tendon, and tsukemen.

Japan Food has more than doubled its halal restaurants to 33 in 1HFY2024’s store expansion alone and halal restaurants now contribute around 50% of Japan Food’s restaurant portfolio and around 45% of its revenue, up from around 25% in 1HFY2023.

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“We expect this segment to account for over 50% of Japan Food’s revenue by end of FY2024,” writes Yeo.

Likewise, Kimly is also concentrating on expanding its halal Tenderfresh brands and Kedai Kopi coffee shops, especially with Tenderfresh delivering encouraging performance.

Overall, Yeo prefers Kimly over Japan Foods in his stock pick strategy, citing the expected consumption for coffee shops to remain elevated this year, further driven by the issuance of the $250 Community Development Council (CDC) vouchers which “should benefit” KMLY due to its coffee shop format.

He adds: “Its valuation is also more compelling at just 10 times forward P/E, and dividend yield of 6%.”

On Japan Foods, the analyst expects operating costs to remain elevated with manpower constraints, higher-than-normal capital expenditure (capex), and elevated depreciation expenses from new stores in the near term. .

Conversely, Yeo likes Kimly for its cash-generative ability, strong net cash balance sheet, and dividend payout. 

“We see growth driven by new outlets, especially in the halal segment. The robust pipeline of Housing & Development Board’s (HDB) eight new eating houses available for tender in 2024 offers opportunity for Kimly to expand its network of outlets, including the halal market sub-segment for its Kedai Kopi coffee shop and Tenderfresh brands. We have factored in higher manpower cost pressures, offset by staff rationalisation initiatives,” opines Yeo.

As at 12.30 pm, shares in Japan Foods last traded flat at 32.5 cents on Jan 19 while shares in Kimly are trading 0.5 cents lower or 1.54% down at 32 cents on Jan 22.

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