• KIMLY LIMITED (SGX:1D0)’s 1QFY19F revenue grew 5% y-o-y, but PATMI dropped 8.2%, due to higher selling and distribution expenses from higher online delivery fees and packing materials used.
• Going forward, the group will continue to expand its footprint and diversify product offerings, as well as synergise central kitchen operations. However, after accounting for higher distribution and selling expenses, our FY19F PATMI drops by 5%, resulting in a lower DCF-backed Target Price.
• With ongoing investigations likely creating an overhang on the stock, we make no change to our call.
• Maintain NEUTRAL, new DCF-based Target Price of SGD0.24 from SGD0.27 reflects 4% downside but with a 4% FY19F (Sep) yield.
• We prefer our top sector pick, SILVERLAKE AXIS LTD (SGX:5CP). See report: Silverlake Axis - Overhang Cleared, Positive 2Q19 Ahead; BUY.

1Q19 underperformance.

• Despite topline growth of 5% y-o-y, PATMI declined by 8.2%. This was on the increase in selling and distribution expenses from higher online delivery fees and packing materials used, as well as a hike in administrative expenses.

Developing own brand of coffee and tea.

• As part of efforts to cater to the public’s preference for healthier dining options, Kimly is developing its own brand of iced coffee and tea, to be sold at all its coffee shops. This is expected to be completed by March.

Growth strategies in place.

• Management is keen to expand its portfolio of coffee shops and product offerings. At the same time, it is streamlining outlet operations and further optimising its central kitchen to improve profitability.

Maintain NEUTRAL.

• As the acquisition of Asian Story Corp has been called off, our investment thesis is no longer valid. Ongoing investigations on the matter will likely be an overhang on the stock and generate some negative sentiment. We believe any potential upside will be limited, despite Kimly’s reasonable valuations.
• In addition, after accounting for higher distribution and selling expenses, our FY19F PATMI is lower by 5%, which leads to a lower Target Price of SGD0.24.
• Downside risks to our call include a rise in rental rates and labour shortages.

Source: RHB Invest Research - 14 Feb 2019