Positioned For Sequential Recovery

Despite revenue weakness in 3Q21 (-20% vs pre-COVID-19 levels) due to prohibitions on dining in, we expect Koufu’s performance to improve sequentially due to: a) dining in prohibitions being relaxed in late-Nov 21, and b) further reopening with more VTL arrangements. On the other hand, business in Macau remains uncertain due to China’s tight border control but is expected to improve once Macau opens up. Maintain BUY and target price of S$0.77 (17x 2022F PE).

WHAT’S NEW

Singapore’s business impacted by Phase 2 Heightened Alert (P2HA) in 3Q21. The P2HA restrictions, which capped social gatherings at up to two persons, lasted almost the entire 3Q21. It was recently announced that from 22 Nov 21, F&B establishments including food courts are allowed to admit five vaccinated persons from different households for dining in while hawker centres and coffee shops are allowed to do so from 23 Nov 21. With the economy suffering due to P2HA, the Group’s business operations in food courts, coffee shops and restaurants have been impacted with lower footfall in malls, offices and tertiary institutions. The Government has announced that in the coming months, as Singapore
moves towards a significant percentage of the population being fully vaccinated, the COVID- 19 pandemic will be accepted as an endemic in Singapore. Koufu expects its business operations to improve once the dining restrictions are eased.

Weakness in Macau. On 16 Mar 21, Macau eased its border restrictions by reopening its borders to foreigners via Mainland China. Under the quarantine-free travel arrangements, which for the moment is only granted to Mainland Chinese visitors, Koufu has seen improvement to the footfall to the Londoner Macao especially during the Labour Day holidays in May 21 where Macau’s daily visitor arrivals jumped to nearly 28,000, more than triple that of 3Q20. However, tourist numbers slid after the reintroduction of pandemic restrictions in the Guangdong province resulting from a surge in the number of COVID-19 cases in the mainland in the subsequent months. Koufu is uncertain as to how the situation will evolve since China is currently experiencing another wave of COVID-19 cases. However, Koufu expects its business operations to improve once Macau is opened up to more Mainland Chinese visitors under the quarantine-free travel arrangements.

New outlets. Koufu has opened one new coffee shop at the new Koufu Headquarters and three new food courts at Marina Square, Nanyang Technological University and Outram Community Hospital in 3Q21. Koufu will also be opening a new coffee shop at Blk 467 Bukit Batok Ave 9 and two food courts at Hougang River Court and Novena Square in 1H22. Aside from the two new R&B Tea kiosks at Fusionopolis and Sun Plaza and three Dough Culture kiosks at SingPost Centre, Sun Plaza and Oasis Terrace that opened in 1H21, it has further opened one R&B tea kiosk at Sinopec Petrol Station in Woodlands Ave 5 in 3Q21.

STOCK IMPACT

Expect better recovery in Singapore as restrictions ease. The Government has announced that in the coming months, as Singapore moves towards a significant percentage of the population being fully vaccinated, safe management measures will be gradually relaxed. The Group expects its business operations to improve significantly once the restrictions are eased.

New integrated facility on track to commence operations in 4Q21. Koufu has obtained Temporary Occupation Permit (TOP) in Apr 21 and subsequently relocated its Head Office to the new Integrated Facility. The dim sum, dough and bakery production plants will be operating from the new facility in 4Q21, which is of a larger production capacity to cater to revenue diversification and network expansion. Koufu’s supply chain and logistics can also be strengthened with the broadening and expansion of the production manufacturing capabilities to achieve higher productivity and product margins. Koufu will be occupying 75% of the total Gross Floor Area (GFA) while the balance 25% will be tenanted out. Of the total area allocated for tenancy, Koufu has to-date finalised and secured full tenancy. As for the 75% GFA to be used for its own operational purposes, Koufu is operating a coffee shop, a cloud kitchen and a staff dormitory and shall be generating rental income from the tenancy of the nine stalls in the coffee shop, 24 cloud kitchen spaces and 132 beds in the staff dormitory. Koufu is actively looking for tenants to occupy the mentioned spaces.

Strong cash position. Koufu’s cash generation ability has helped it build a significant net cash of S$69m as at 1H21, equivalent to about 20% of its market capitalisation.

EARNINGS REVISION/RISK

• We kept our earnings estimates unchanged.

VALUATION/RECOMMENDATION

Maintain BUY and PE-based target price of S$0.77, pegged at 17x 2022F PE or around 20% discount to peers’ average. Koufu has the highest ROE and is the most profitable among local peers.

SHARE PRICE CATALYST

• Completion of the sale of two central kitchens and special dividend.
• Easing of travel restrictions and strong-than-expected recovery from COVID-19 impact.