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Kimly lays out modest growth plans amid ongoing probe

Trinity Chua
Trinity Chua12/24/2018 07:30 AM GMT+08  • 7 min read
Kimly lays out modest growth plans amid ongoing probe
SINGAPORE (Dec 24): The past weeks have been rough for coffee shop chain operator Kimly, whose IPO on Catalist last year was among the most sought after. The group’s first major acquisition since its listing on Catalist has been rescinded.
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SINGAPORE (Dec 24): The past weeks have been rough for coffee shop chain operator Kimly, whose IPO on Catalist last year was among the most sought after. The group’s first major acquisition since its listing on Catalist has been rescinded.

Its executive chairman Lim Hee Liat and executive director Chia Cher Khiang are under investigation by the Monetary Authority of Singapore (MAS) and the Commercial Affairs Department (CAD), and have had their passports impounded. On Dec 18, the company released a six-page business update, a move one observer says is meant to reassure investors that the coffee shop business is still intact despite the upheavals.

Shares in Kimly have fallen 14% since the chain of events started — and have made little recovery after the business update, closing at 24 cents on Dec 20. The counter has shed more than 30% of its value this year.

Kimly’s current predicament can be traced back to July, when it announced the acquisition of a drink company called Asian Story Corp for $16 million in cash — a sum equivalent to half its IPO proceeds set aside for acquisitions and business expansion. This price tag is also about 35.7 times ASC’s net tangible asset value of $448,000 as at end-March.

ASC claims it has a 7.7% market share of what it calls the Asian drink market in Singapore. It outsources the production of drinks to a local subsidiary of Japanese beverage company Pokka Corp. ASC was sold by one Wang Chia Ye, who was later found to be a former Pokka employee.

For more than four months, the acquisition of ASC went largely unnoticed by the market until Nov 27, when Kimly asked for the trading of its shares to be suspended. Two days after, the company said Lim and Chia had been placed under investigation by MAS and CAD for suspicion of flouting the Securities and Futures Act.

In addition to Lim and Chia, Alain Ong Eng Sing, Kimly’s former non-executive director, is under probe as well. When he was CEO of Pokka’s subsidiary in Singapore, Ong had hired his wife, Vivian Lai, an actress, as Pokka’s brand ambassador for years. Ong was reportedly suspended from Pokka and poised to join Kimly. The company neither denied nor confirmed his appointment, according to a filing with the Singapore Exchange.

Kimly said it cancelled the ASC acquisition because Pokka would be terminating its manufacturing deal with ASC. The terms between Pokka and ASC are unclear. Wang has returned $12 million to Kimly but will repay the remaining $4 million over three years.

While both Lim and Chia are out on bail, they were absent from the company’s Dec 18 business update press briefing. Rather, Karen Wong, its newly appointed finance director, fronted it. Wong says that, even if Lim and Chia are unable to carry out their duties, Kimly has a succession provision in place. “We have in place a mentorship and succession plan that ensures seamless transition and minimal disruption to the business in the event of management changes. If one of the leaders is retiring or chooses to step down, the immediate next-in-line will be well equipped to take over their position and responsibilities,” the company says. In the meantime, both men remain involved in the daily affairs of the business. “They are still guiding the company,” says Wong, who was joined by Ronnie Yeo, Kimly’s manager for business development and special projects, as well as human resources head, Roy Tan, at the press briefing.

RBH analyst Jarick Seet warns that while Kimly’s daily operations can be managed, there are bigger concerns to be addressed. “I think the strategic side of the business would be negatively impacted and they might have to find a new CEO if those two are put out of action,” says Seet, who on Dec 3 downgraded the stock from a “buy” to a “neutral” and lowered his price target to 27 cents from 43 cents because of the canned ASC deal. Following a more recent update on Dec 18 from the company, Seet is keeping his “neutral” call.

With the ASC acquisition cancelled, Kimly will concentrate on the organic growth of its core coffee shop business for now. Revenue for FY2018 ended Sept 30 rose 5.3% to $202.2 million and earnings grew 2.1% to $21.9 million.

“Our revenue was driven by the opening of new outlets over the past years. Every year, we secure three to five outlets. We believe we will be able to do so in 2019,” says Wong. Kimly runs 60 coffee shops now and is in talks to buy three more. It aims to run 70 coffeeshops by end-September next year. Besides collecting rent from individual stalls, it provides cleaning services too.

Kimly see this core business as highly resilient. Its outlets have an average occupancy rate of 98% and more than 80% of tenants renew their leases. “We are the biggest traditional coffee shop owner. We have a market share of only 6%. We still have a bit more to grow,” says Yeo.

For FY2018 ended September, the outlet management division generated 56% of Kimly’s total revenue. The remaining revenue was from the company’s food division, which generates better margins than outlet management. On revenue of $140.7 million in FY2018, outlet management generated earnings of $11.5 million while food generated sales of $110.5 million, but with earnings of $18.8 million.

The food division comprises 130 stalls selling seafood, dim sum and mixed rice. “Most operators do not have a food division. When we [acquire] a coffee shop, we already have our own cornerstone investors [or stalls]. That gives confidence to others to come in,” says Yeo. It also has three Japanese food restaurants and 10 bakeries. The company plans to expand its central kitchen, which supplies sauces and semi-finished food products.

Kimly will also beef up its online food delivery services. It saw a threefold increase in sales this year from the previous year. But online sales accounted for only 2% of total revenue in FY2018. The group plans to grow its online bakery business Rive Gauche, potentially letting customers order customised cakes.

Interestingly, Kimly is not giving up on having its own drinks business. By March 2019, it will launch its own brand of ice coffee and tea to cater to customer preference for more healthful drinks with less sugar, Wong says.

As at Sept 30, Kimly had cash and cash equivalents of $71.7 million and no borrowings. With the fallout from the ASC-related probe just starting, however, RHB’s Seet believes Kimly will not be making any significant acquisitions soon, and will instead aim for “single-digit” earnings growth for now. “The company should take a breather and, once the investigations are cleared, find its footing and identify another area in which growth can be more rapid,” he says.

Correction

Our story “REIT sponsor Ascendas-Singbridge focused on stable, profitable growth” (Issue 860, Dec 10) should have said that Ascendas Hospitality Trust was listed in 2012, and not as reported. Ascendas-Singbridge Group clarifies that it has three businesses in India — a listed fund, private funds and balance sheet developments. Besides Mitsui & Co, Tokyo Tatemono is another jointventure partner of the group in the Central Provident Fund building redevelopment project. In addition, the JTC bond should be $3.5 billion, and not as reported. If the bond is considered quasi-equity, return on equity would have been 8.6%. The debt-to-equity number depends on whether the JTC bond is considered debt. If it is considered debt, gross and net debt-to-equity would be 2.5 times and 2.3 times respectively. If it is treated as quasi-equity, gross and net debt-to-equity would be 0.57 times and 0.45 times respectively.

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