• We remain positive on KOUFU GROUP (SGX:VL6)’s ability to deliver a 19% EPS growth in 2019, backed by:
  1. robust growth in the F&B macro data,
  2. better performance in the food court management segment on full-year contribution from Rasapura and new outlets, and
  3. stronger F&B retail segment from turnaround at both R&B Tea outlets and Elemen restaurants.
• Maintain BUY and PE-based target price of S$0.95.
• Koufu is undervalued at 10.3x 2019F ex-cash PE, vs peers’ average of 21.7x 2019F PE.

What’s New

Positive macro data for the F&B industry, especially food courts.

• The latest F&B service index (FBSI) data from Singstats indicates that ‘’other eating place’’, which excludes restaurants, fast food outlets and caterers, is showing a healthy growth trend since 4Q18 (c.3-4% y-o-y) compared with 0% growth in the first three quarters of 2018.
• On the other hand, the restaurant industry’s growth is declining. This could indicate that consumers are switching into lower-value dining options amid a weaker economic backdrop.

Food court segment on track to perform better on the back of refurbished Rasapura and new outlets.

• We expect Koufu’s court management segment better on full-year Rasapura food and more new.
• To recap, Rasapura - Koufu’s largest court in term revenue - was closed refurbishment 2Q-3Q18 reopening, Rasapura has notable improvement 4Q18 lifted Koufu’s same-sales growth.
• On the hand, Koufu has opened new courts in Singapore three Macau one far. We that the of new courts performing and have EBITDA level.

R&B Tea and Elemen turnaround should boost F&B retail segment.

• We expect R&B Tea to be on to contribute around S$1 earnings in 2019 (2018: breakeven, and Elemen to about S$0 earnings in 2019 (2018: marginal loss-making).
• Operationally, the R&B Tea business gaining traction a faster period while the tie with food companies to help.

Growing cash hoard and position as most-profitable listed F&B company not fully appreciated yet.

• Despite Koufu's ytd share price increase of 17.1% due to increased analyst coverage (see analyst reports on Koufu) and a subsequent increased market awareness of the company, as well as improved financial track record, we think the market has still yet to fully realise Koufu’s strong cash flow generation ability which has helped it build a significant cash hoard of S$98.7m as of 1Q19, equivalent to 25% of its market cap.
• In addition, the market has also not fully appreciated Koufu as the most-profitable listed F&B company.

Stock Impact

We remain positive on Koufu’s ability to deliver 19% EPS growth for 2019.

• 1Q tends to be seasonally weaker due to a short month in February as well as extended closures during Chinese New Year. With full-year contribution from Rasapura, new outlets ramping up and steady roll-out of R&B Tea outlets, we think net profit for 2019 is on track to meet our expectations.

Earnings Revision / Risk

• We maintain our earnings estimates.
• Risks include failure to renew leases, inability to secure new outlets, departure of key tenants and food stalls, changing consumer preferences, higher-than-expected competition, and execution risks on expansion plans.

Valuation / Recommendation

• Maintain BUY and PE-based target price of S$0.95, based on 18.1x 2019F PE, pegged to a 16% discount to peers’ average PE.

Share Price Catalyst

• Sale of two central kitchens and special dividend.
• Better-than-expected contribution from R&B Tea.
• Better-than-expected performance from food court management segment.

Source: UOB Kay Hian Research - 3 Jul 2019