• Maintain NEUTRAL, new DCF-based Target Price of SGD0.24 from SGD0.23, 0% downside with 6% FY20F (Sep) yield.
• KIMLY LIMITED (SGX:1D0)'s FY19 revenue rose 3% y-o-y, but PATMI dropped 8.4% from higher selling and distribution expenses. We expect Kimly to continue growing its footprint and diversifying product offerings. It recently synergised central kitchen operations, and announced the acquisition of 10 coffee shops and industrial canteens for SGD59m.
• With the ongoing investigations likely to create an overhang effect, we make no change to our call.

FY19 Results Are Below Expectations

• Despite its topline growth of 3% y-o-y – propelled by contributions from Japanese restaurant chain Tonkichi and Japanese-French confectioner Rive Gauche – PATMI declined 8.4% y-o-y due to the hike in selling and distribution expenses, which in turn stemmed from higher online delivery fees and packing materials used, as well as a hike in administrative expenses.

Back to Bread-and-butter Business

• Kimly recently announced a strategic shift to acquire more long-term and direct assets in the form of food outlets and food stalls, to increase revenue streams and reduce risks associated with leasing and tenancy. It did this by acquiring a portfolio of 10 coffee shops and canteens for SGD59m. The acquisition was funded by SGD46.06m in cash and SGD10m worth of shares at a premium of SGD0.25/share.
• Management is streamlining outlet operations and further optimising its central kitchen to improve profitability. To enhance front-end outlet efficiency, it has commenced several enhancements 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 the preparation of sliced meats 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.

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• As the acquisition of Asian Story Corp Pte Ltd has been called off, our investment thesis is no longer valid.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 are likely to be an overhang on the stock, and dampen investor sentiment. We believe any potential upside will be limited, despite Kimly’s reasonable valuations.
• Dividends are likely to increase, as management has doubled the interim payout, which affirms the positive strong cash generation from its core business.
• Our DCF-based Target Price rises to SGD0.24, to reflect the inclusion of profits from its recent acquisition.
• Downside risks to our call include a rise in rental rates, and labour shortages.

Source: RHB Invest Research - 28 Nov 2019