News Analysis: Streamline business with sale of non-core confectionary business
- Proposed disposal of the confectionary business for c.S$2.6m gain
- Strong balance sheet can be used to fund inorganic growth opportunities
- Undemanding valuations of 0.5 SD below five-year average supporting yields of 4.4%/4.8 in FY22F/23F
- Maintain BUY and unrevised TP of S$0.50
Our thoughts
Kimly announced last Friday (9 September 2022) the proposed disposal of its confectionary business, which comprises the business of manufacturing and operating of western pastry and confectionary specialty shops (including online sales) carried on under Rive Gauche Patisserie. We understand that it is to streamline the Group’s business operations and better utilise resources to boost its core business in operating coffeeshops. Purchase price for the assets is at S$2.8m while the book value of the assets is at S$218,804 as at 30 September 2021, resulting in a potential gain on disposal of c.S$2.6m. The Rive Gauche Patisserie business contributed to c.0.5% of the Group’s net profit in 1H22.
The Group had a strong balance sheet with S$65m cash as at 31 March 2022. Disposal proceeds will be used as general working capital and to further strengthen the Group’s balance sheet, enhance financial flexibility and facilitate any future plans. There could be further upside to our earnings estimates if Kimly can deliver more acquisitions by using its strong balance sheet to fund inorganic growth.
We expect the Food Retail segment to be the key driver of long-term growth, projecting a 30% revenue CAGR in FY21-23F. Despite the closure of 12 food retail stalls in 1H22 due to rationalisation of manpower resources, the maiden contribution of Tenderfresh in FY22 should help to offset the top-line decline. Management shared that manpower has always been a challenge, which worsened during the pandemic. However, the situation is improving as Singapore reopens its borders and returns to a new normal. While there are no plans to close more stalls, we understand that the reallocation of resources is an ongoing effort by the Group. We maintain our belief that hybrid working will be the way forward for most companies and this will continue to drive growth in the Food Retail business through higher footfall and more food delivery orders for the food stalls in the heartlands. Further, we are optimistic on Kimly as consumers could favour more affordable food options in an inflationary environment.
Valuations remain undemanding at 11x FY22F P/E, which is c.0.5 SD below its five-year average. With strong cash flow generation supporting decent yields of 4.4%/4.8% in FY22F/23F, we maintain our BUY recommendation and target price of S$0.50.
