Kimly at night

This is another great analysis by our guest analyst, this time about a counter with a bitter-sweet tale to tell.

Do note the volumes can be low on this counter.

Here is the price chart of Kimly, there isn’t a lot of data because it only listed in April this year.

Kimly price chart

The fanciful story of Kimly Limited (SGX: 1D0) – from Kopi-o to IPO- was sweet.

After listing, new investors who bought Kimly in the market are left feeling bitter.

Share price has moved lower on selling pressure, as investors realise that the coffeeshop king should sell in line with peers.

Further downside is beckoning, given that the company is still trading at a premium to peers.

The bull market is an opportune time for companies to cash out, Management of Kimly is smart to do so, selling 173.8m shares at $0.25 apiece when the average price of founding directors paid $0.037/share - about 11x cheaper than market price!

It may be worthwhile to mention that the sponsor’s valuation team is not very friendly with public shareholders. PrimePartners was the Kimly’s IPO sponsor. The corporate finance company has been active in many small-cap companies seeking Catalist-board listing. Recent client Spackman Entertainment (SGX: 40E) offered its shares at $0.26, with its shares last traded at $0.14 (14 June 2017). QT Vascular (SGX: 5I0) was worse, languishing close to zero when its IPO price was $0.28. We have not done extensive due diligence on the company’s track record in bringing private companies public, but we remember a case of hotly traded stock CCM Holdings back in the boom year of 2011, which eventually changed its name to Singapore eDev, undertaken many corporate actions and eventually became somewhat non-existent in SGX.

Against the record, it remains to be seen where Kimly will be in years to come.

When you buy Kimly Holdings, what exactly are you in for?

You are buying smart management. The management knows well that the traditional business model of coffeeshop is facing significant headwinds. Management didn’t drill the point across to you explicitly (except in risk section), highlighting instead the successive years of earnings growth between FY13 and FY16.

Until they have gone public and issued their first quarterly report did they mention challenging business landscape. In the report, revenue in 2Q17 (ending March 2017) rose 12.4% y/y, while profit after tax (after adding back the listing expenses) remained constant relative to the same period last year.

It is evident that earnings are unlikely to be exciting in future periods, with the only viable means of growing bottomline is through horizontal acquisitions.

It should be noted the report was cautiously worded with “we expect the outlook of F&B industry to remain challenging.”

Ahh, smart management dilutes their shareholdings to public shareholders.

The slide in share price may well be the beginning. Moratorium is in place to restrict directors from selling, but only until September 2017. In between the three months, investors may enjoy the buoyant valuation. On a side note, bonus for executives amounted to $0.3million in 2Q17. At this point, we cannot be sure if this bonus will continue when the business is not growing. A celebratory bonus for listing perhaps?

Pacifying shareholders with 2.6% dividend yield on current share price $0.40 barely keeps dividend hunters in the long haul.

With a stagnating business squeezed by rental and labour costs, there is hardly organic earnings growth in sight. The company wants to tap on third-party delivery services (eg UberEats, Deliveroo and Food Panda) for its food offering.

We are not convinced that there would be a sizable consumer base that orders homogeneous food particularly from Kimly kopitiam.

Earnings will have to come from streamlining cost, which has a limit really.

Where else can the company eke out earnings is a key aspect we have no clarity yet.

One may argue, “it’s the same for most F&B businesses in Singapore!” True, to a large extent.

With the slump in share price, from opening day of $0.55 to current $0.40, the valuation of 20.4x P/E is just about in line with peers.

We shortlist Old Chang Kee (SGX: 5ML), Neo Group (SGX: 5UJ) and Japan Foods (SGX: 5OI) that trade at PE 20.5x, 29.9x and 17.0x, respectively.

These companies have unique branding and the same cannot be said of Kimly.

Old Chang Kee has its puff series, while Japan Foods has its business model built on successful franchising restaurant-worthy food into Singapore.

Neo Group banks on centralised kitchen to reduce cost to its buffet-style catering.

On the other hand, Kimly has its seafood brand to boast, and basically that is about it.

In this space, the company can hardly compete with the likes of Jumbo (SGX: 42R) or No Signboard seafood.

Kimly’s business model is akin to a property leasing firm. It purchases/leases land or entire coffeeshop before subletting to other tenants. It is resilient in the sense that most of its coffeeshops enjoy full tenancy. However, the turnover rate is high.

There will be a point in time when tenants just cannot make sufficient return on capital with Kimly and give up on renting stalls from the company. We foresee a day when demand for air-conditioned coffeeshops would rise, straining the capital expenditure of Kimly.

Passing on the incremental capex to tenants operating at break-even points may prove challenging.

Bearing in mind that Kimly functions more like a property firm, does it still warrant the F&B valuation at premium?

Blue-chip property firms like City Development (SGX: C09), CapitaMalls Asia (SGX: JS8) and Capitaland Limited (SGX: C31) trade closer to 15x PE. At 15x PE, Kimly would be selling at $0.29 a share. This is the price we find more palatable, and it is just about 20% above its IPO price of $0.25 – a valuation that Prime Partners found it reasonable, but the jubilant market deemed it as Great Singapore Sale came early.

There is 27% downside to the current share price! In theory, that is. Some $30.4 million of the IPO proceeds will go towards acquisition. Assuming leverage at 40%, the acquisition coffer is $76 million. We further assume that the net margin remains stable at 15%.

Therefore, full year earnings could be as much as $33.4 million on a consistent basis at full capacity when the acquisition pipe flows, translating into 13.9x PE.

This is a rough ballpark figure, which is based on aggressive estimates.

Either way, it is clear to us that the valuation of Kimly is rich at $0.40 per share.

We would sit out and keep it in our radar should it drop below $0.34, representing 15% downward adjustment from the current level. Share price is unlikely to present trading opportunity before September - when directors are no longer bounded by selling restrictions. If you have a bitter tooth for caffeine, go for it. Because we have a sweet tooth and we can't taste any sweetness at this valuation.

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