Company’s Background

Kimly Limited, an investment holding company, operates coffee shops in Singapore. The company operates through three segments: Outlet Management, Food Retail, and Others. The Outlet Management segment engages in the sale of food, beverages, and tobacco products; leasing of food outlet premises to tenants; and provision of cleaning and utilities services to tenants, as well as management services to third party coffee shops.

It operates and manages 67 coffee shops and four industrial canteens under the Kimly brand and a third party brand; and three food courts under the foodclique brand. The Food Retail segment is primarily involved in the retail of cooked food directly to consumers through a network of 83 food outlets under the Kimly, foodclique, and a third party brand; and 137 food stalls comprising Mixed Vegetable Rice, Teochew Porridge, Dim Sum, and Seafood Zi Char, as well as 1 Kanaaji Japanese Tonkatsu food stall, two Tonkichi restaurants, and seven Rive Gauche confectionery shops. The Others segment offers management, finance, human resource, treasury, and administrative services. Kimly Limited was founded in 1990 and is headquartered in Singapore.

Opportunity/ Potential

I believe that the company will benefit from the reopening of Singapore post covid. Currently, only 2 vaccinated persons are allowed to dine at coffee shops and restaurants. This will probably negatively impact its “Zi Char” outlets more as it is difficult to order food when there are only 2 diners. Typically, Zi Char is a place where the whole family will gather for a meal over the weekend, ordering many dishes which will probably include seafood and meats.

As the largest coffee shop operator in Singapore, having outlets all over the heartlands with high human traffic ensures that the business is well diversified. As they are serving the mass market segment, their business is less sensitive to economic slowdown. Its outlet management division will also stand to benefit once Singapore starts to live with covid, managing it more like an endemic than pandemic.

Annual Report 2020

During the peak of the pandemic, the company also took the opportunity to accelerate its digitalisation efforts by engaging more third party food delivery platforms such as GrabFood, Deliveroo, and Foodpanda. Going forward, the company is expected to leverage on social media to better engage its customers and increase customer stickiness.

Their upgraded central kitchen was a gamechanger for the company at the peak of the covid crisis. Food retail division received much support from the central kitchen which enabled them to continue catering to their broad and varied customer base. During the three-month Circuit Breaker period, the continued supply of raw materials became a concern but the company managed to stock-up on essential raw materials such as meat, poultry and seafood in their central kitchen.

Kimly also established alternative sources for raw materials to improve on their supply chain resilience during this period. Their manufacturing capabilities in the central kitchen also meant that they were able to produce large amounts of food and as such, reduce the cost of these materials by making bulk purchases. At the same time, given that manpower onsite had to be reduced due to social distancing measures, their central kitchen managed to further assist them in reducing manpower reliance at the food stalls. This has proven that the central kitchen is a unique and key factor in providing resilience along with innovation to their operations.

Tenderfresh Acquisition in May

In May 2021, Kimly acquired Tenderfresh for S$54m, S$38m is to be paid in cash and S$16m in shares as per the group’s announcement dated 11 May 2021. S$4m of the cash portion is deemed as earn-out consideration, upon achieving the target profit before tax of at least S$9m for FY22F. Assuming a tax rate of 20%, implied valuation of the deal is 10x FY22F P/E. With this, we can expect Tenderfresh to contribute S$5.4m net profit to Kimly in 2022.

Benefits of this acquisition include allowing the company to move into the halal market in Singapore and add on to its existing offering as well. On top of that, Tenderfresh may leverage on Kimly’s extensive network to open up new stores and expand revenue and coverage.

Going forward

The company is looking to embark on acquiring more direct asset ownership of the food outlets. In view of the limited supply of coffee shops in Singapore, I see this move as positive as this will reduce operating cost in the long run and provide alternative sources of revenue, i.e. rental income. Moreover, the value of these assets are also expected to appreciate in value in land-scarce Singapore. With this I am expecting the company to continue its food outlets’ acquisitions in the future as they shift away from the asset light business model.

Financials

The company achieved its highest revenue of S$210.8 million in FY2020 since listing compared to S$208.3 million in FY2019. The increase of S$2.5 million was mainly due to an increase in revenue contribution from the Food Retail Division of S$7.2 million, attributed to the growth in food delivery sales. This was a result of the Group’s stronger online food delivery presence due to increased marketing efforts during the year, along with heightened food delivery demand during the Circuit Breaker period. The increase also came from revenue contribution by the Group’s newly diversified Outlet Investment Business Division of S$3.1 million, which was mainly contributed by the sale of beverages and tobacco products, rental income and provision of cleaning and utilities services from the food outlet properties acquired in FY2020.

Gross profit has been growing at a CAGR of 8.72% in the last 5 years. We are seeing improved gross margin over the years. In FY2020, the gross margin was 26.8%, an improvement of c. 34%. From FY2016-2019, gross margin was hovering around 20%. This improved margin may be a result of economies of scale in food production, contributed by the central kitchen and bulk purchase of raw materials as a result of increased food outlets.

In the past 4 years, we see that its food retail business is growing at c. 6.3% annually and their outlet management division’s revenue had stayed constant, except for FY2020, as a result of the covid crisis. As such, I believe that revenue from outlet management division should improve with the opening up of Singapore post covid.

Kimly saw a record profit in FY 2020, but that is with the government’s support during the covid crisis. With outlet management and food retail division numbers expected to improve post covid, I believe that the company will continue to grow EPS further.

Estimates

As of today (2021-10-14), Kimly’s share price is S$0.37. Kimly’s Earnings per Share (Diluted) for the trailing twelve months (TTM) ended in Mar. 2021 was S$0.0309. Therefore, Kimly’s PE Ratio today is 11.94. Dividend yield is c. 3.78%

During the past 7 years, Kimly’s highest PE Ratio was 20.00. The lowest was 11.18. And the median was 14.32.

Based on a 1 year EPS growth of 25%, taking into account contribution from Tenderfresh and potential reopening of Singapore post-covid, target price $0.46118.

Risks

  1. Increased raw material cost.
  2. Regulatory risks in terms of foreign labour.
  3. Increased cost of labour as a result of covid (administration and prolonged movement control).
  4. Failure to renew or secure new leases.
  5. Food Hygiene.
  6. Corporate Governance

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