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UOB Kay Hian keeps ‘hold’ rating on Kimly, but lowers target price as appetite for future food stalls drops

Lim Hui Jie
Lim Hui Jie12/12/2022 01:43 PM GMT+08  • 3 min read
UOB Kay Hian keeps ‘hold’ rating on Kimly, but lowers target price as appetite for future food stalls drops
The analysts think that fewer new coffeeshops and food stalls can be expected in the near future. Photo: Albert Chua/The Edge Singapore
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UOB Kay Hian analysts Heidi Mo and John Cheong have kept their “hold” call on coffee shop operator Kimly, but have trimmed their target price from 37 to 36 cents.

The analysts note that increased operating costs continue to dampen margins for the company.

This comes from higher energy costs, driven by rising global gas and oil prices exacerbated by the Russo-Ukraine conflict.

Staff costs have also increased by about 15% to 20% due to a manpower shortage.

Furthermore, the Singapore government has also raised the minimum qualifying salaries for foreigners by 11% to 20% from September 2022.

According to the Restaurant Association of Singapore, roughly 35% of the total workforce in the F&B sector is foreigners, and this will significantly impact industry players, including Kimly.

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In light of this, Kimly’s gross profit margin has fallen by 3.6 percentage points y-o-y to 29.2% in FY2022 ended Sept 30. “With the addition of spiking raw material costs from inflationary pressures, margins will likely continue to decline,” the analysts say.

Mo and Cheong also foresee fewer food outlets in future, given that Kimly has announced that it will sell Rive Gauche Pâtisserie, its confectionery business for a sale consideration of $2.8 million to Muginoho Global.

The disposal comprises seven branches, and is expected to be completed in FY2023.

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On top of this, the agreements of nine coffee shops under a third-party brand were expected to be terminated in 2HFY2022, upon completion of an internal reorganisation.

As four coffee shops have yet to be terminated as of end-FY2022, they foresee the closure of these shops in the next financial period.

“Notwithstanding Kimly’s guidance of three to five new outlet openings annually, we foresee fewer food outlets in aggregate, which will negatively impact future earnings.”

On the other hand, Mo and Cheong note that the company is still recording strong performance from its food retail segment.

FY2022 revenue from the group’s food retail segment has risen substantially from $119.4 million to $191.2 million, a 60.2% jump y-o-y. This was mainly from the newly-acquired Tenderfresh Group in October 2021.

The analysts explain, “despite the closure of 11 underperforming food stalls during the year, the opening of eight Tenderfresh food stalls has boosted the group’s revenue.”

As management continues to set up more Tenderfresh food stalls in its coffee shops, Mo and Cheong say the group can capture growth opportunities in the Halal dining scene, which was last estimated at $1 billion in 2019.

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Kimly’s balance sheet is also strong, with a net cash position of $77.6 million at end-FY2022. Despite being lower than the $95 million in FY2021, the lower net cash balance was largely caused by the $34 million purchase for Tenderfresh.

Nonetheless, they have lifted their FY2023-FY2024 revenue forecasts slightly by 2.2% and 2.1% respectively, on greater contributions from the Tenderfresh network, although this is reduced by the higher operating costs assumptions and fewer outlet openings.

Accordingly, we have increased our FY2023-FY2024 net profit estimates slightly by 3.4% and 3.2% to $34.9 million and $37.9 million respectively.

They also highlight that Kimly has also proposed a final dividend of 1.12 cents per share, bringing the total FY2022 dividend to 1.68 cents per share. “This indicates about a 5% dividend yield, and demonstrates Kimly’s consistency in its policy of paying out over 50% of annual earnings.”

As of 12.50 pm, shares of Kimly were trading at 34 cents, with a FY2023 P/B ratio of 2.5 and dividend yield of 4.9%.

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