• Koufu’s primary business is in managing food courts and coffee shops. The company also runs F&B stalls and kiosks, full-service restaurants as well as QSR. This give rise to diversified revenue streams from its outlet and mall management and F&B retail segments.
• Going forward, it plans to open new outlets in Singapore and overseas.
• Koufu also aims to improve margins by increasing investments in technology to enhance productivity and establishing a larger central kitchen.

Calculated Expansion in Singapore and Overseas

• Currently, Koufu operates 48 food courts and 80 food and beverage (F&B) stalls across Singapore and Macau. It also runs 14 coffee shops, F&B kiosks, 11 quick-service restaurants (QSR), three full-service restaurants, a hawker centre and a commercial mall in Singapore.
• Moving forward, its food court expansion will focus on hospitals, commercial malls, tertiary educational institutions and new housing estates in Singapore and Macau. The group is also looking to partner companies to bring its F&B retail brands such as R&B and Supertea to Malaysia and Indonesia.

Growing Margins by Opening Integrated Facility in Woodlands

With construction expected to begin in 4Q and targeted to be completed in 2H20, the integrated facility will have a gross floor area of 20,000 sqm, five times larger than the existing central kitchen. It will house a larger central kitchen and a centralised dishwashing facility to serve its food courts located in the Northern and Western regions.

The new facility should engender greater cost savings through the central procurement and preparation of food. This will reduce its manpower needs and improve space utilisation in the F&B outlets. This facility is also expected to generate rental income for Koufu, as it lets out a few floors to its food court stall tenants as mini-central kitchens. This allows the stall operators to increase production and potentially open more stalls at Koufu food courts. Management believes the potential rental income generated could offset the depreciation cost of the new facility.

Promising Dividend Payout Ratios

Koufu has a dividend recommendation of at least 50% of net profit after tax generated in FY18 and FY19. We believe this should translate to a dividend yield of around 3-3.5%. This is backed by a net cash balance of SGD40m, consistent and positive generation of cash flow and the resilient nature of the business against challenging economic cycles.

Valuation

At present, Koufu is trading at a historical P/E of 11.7x, ie at a discount to the 23.5x peer average. We deemed this attractive, given its superior net margin and higher dividend yield.

Key Risks

Koufu operates in a mature market with stagnating sales in the F&B services industry and rising competition. Inability to expand its outlets in good locations would limit the group’s earnings growth.

Other key risks include an inability to pass on higher rental costs to stall operators and food safety issues cropping up.

Source: RHB Invest Research - 10 Sep 2018