SINGAPORE (Apr 16): RHB is initiating its coverage on Kimly, the operator of local coffee shops and food courts, with a “buy” and a 43 cents target.
That's because Kimly's F&B mass-market business is defensive in nature and is accompanid by has rich cashflows.
Since FY14, the group has reported stable gross margins of more than 20% and is expected to stay around this region going forward.
The group currently operates and manages 60 coffee shops and four industrial canteens under the Kimly brand and third party brands, as well as four food courts under the foodclique brand.
As at Sep 30 2017, the group enjoyed a 98% occupancy rate across nearly 500 stalls within its managed food outlets.
Meanwhile, the group’s management is looking to add one to two coffee shops a year, as well as ramping up on the third party brands, which it has been doing.
In a Monday report, analyst Jarick Seet says, “We are expecting at least 3-4 more additions to its portfolio in FY18.”
The group intends to declare an annual dividend of not less than 50% of its earnings, translating into a yield of 2.9% for FY18.
However, the group has net cash of $91 million and positive cash flows from operations of up to $8 million a quarter.
“With estimated capex of just $2-3 million a year, we think that it is highly possible for management to pay higher dividends in the near future,” adds Seet.
In addition, the group is also seeking M&A as well as joint venture opportunities, for vertical integration and to boost up its value chain proposition in 2018-2019.
“We like the defensive and rich cash flow generative nature of Kimly’s business, and we think that the new outlets it invested in during 2017 and coming up in 2018 will likely be profitable in 2019- 2020,” says Seet.
Furthermore, with the M&As in pipeline, the analyst believes that growth would be “exciting” in the near future.
As at 10.15am, shares in Kimly are trading at 34 cents, below peer average of 24 times earnings.
The stock is also trading at 18.3 times FY18 earnings, with a dividend yield of 2.7 times.
