• Maintain NEUTRAL, with an unchanged DCF-based Target Price of SGD0.23, 4% downside.
• KIMLY LIMITED (SGX:1D0)'s 3QFY19 revenue rose 3.5% y-o-y, but PATMI dropped 6%, due to higher selling and distribution expenses. Kimly should continue to expand its footprint and diversify product offerings, synergise central kitchen operations and have secured three new coffee shop leases through the HDB’s tender system.
• With ongoing investigations likely to create an overhang on the stock, we make no change to our call.

3QFY19 (Sep) Below Expectations

• Despite topline growth of 3.5% y-o-y propelled by contribution from Japanese chain restaurant Tonkichi and Japanese-French confectioner Rive Gauche, Kimly's 3Q19 PATMI declined 6% y-o-y due to the increase in selling and distribution expenses from higher online delivery fees and packing materials used, as well as a hike in administrative expenses.

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. To enhance front-end outlet efficiency, it has commenced several enhancement and work process improvements at its central kitchen. In addition to preparing marinated meat products which are then supplied to “mixed rice” stalls, the central kitchen has in recent weeks commenced preparation of sliced meat and semi-finished food products for its seafood zi char stalls. Centralisation simplifies food preparation at the stall front, and accordingly reduces labour hours and skill required.
• Kimly has also secured the lease of three coffee shop sites through the Housing and Development Board’s (HDB) tender system, price-quality method (PQM).
• Kimly will further introduce two new products and concepts. The first is a bak kwa (肉干) pau (BBQ pork jerky bun), a collaboration with Peng Guan Food Manufacturing Pte Ltd. The second is Kanaaji, a new brand expanding on quality and value for Japanese cuisine.

Maintain NEUTRAL

• As the acquisition of Asian Story Corp Pte Ltd has been called off, our investment thesis is no longer valid. Ongoing investigations on the matter is likely to be an overhang on the stock, and generate some negative sentiment. We believe any potential upside will be limited, despite Kimly’s reasonable valuations.
• Dividends are likely to increase as management has doubled interim payout, which affirms the positive strong cash generation from its core business. See Kimly's dividend history.
• Downside risks to our call include a rise in rental rates, and labour shortages.

Source: RHB Invest Research - 13 Aug 2019