• We like Koufu’s net cash position, strong cash generation, and superior ROE and net margins vs. its peers.
• Potential beneficiary of pent-up demand post phase 2 reopening, it expects average store sales to recover to 80-85% of pre-outbreak levels by Jul.
• Our channel checks over the weekend also saw stronger footfall at some of its outlets.
• Catalysts: more store wins and opening of its integrated facility.

Conference Call With Koufu Management

• We recently hosted Koufu (SGX:VL6) on a conference call with a group of institutional clients. We remain positive on the stock as it is likely to benefit from pent-up F&B demand after phase 2 reopening, and possible consumer down trading during the economic downturn.

Benefiting From Return of F&B Dine-in

• With Singapore’s transition into phase 2 reopening effective 19 Jun, same-store-sales growth (SSSG) at Koufu’s food courts and coffee shops has recovered to -20% vs. the 30- 40% y-o-y decline during the months of circuit breaker, while its restaurants reported slower traction.
• We also found varying levels of footfall during our channel checks over the weekend. Should such trends sustain, management believes revenue could return to 80-85% of pre-Covid-19 levels in Jul 20, posing potential upside to our FY20F earnings.
• Meanwhile, its two Macau outlets continue to see low footfall due to absence of tourists.

Slow and Steady Wins the Game

• Koufu has delivered steady growth in its outlet and mall management (OMM) business, opening at least 2-3 new outlets every year. On average, 10-12 new sites are put up for bidding yearly by the Housing and Development Board (HDB), and up to 20 in a good year.
• Thanks to its established track record and competitive pricing, Koufu’s win rate has been higher than its peers. Its OMM PBT margin has also improved from FY15’s 6.1% to 16.3% in FY19, as the group closes less profitable food courts and reaps higher operating leverage.
• Apart from securing more locations in housing estates, hospitals and schools, it also aims to add 10-20 F&B stalls/kiosks/restaurants p.a. and export its brands overseas via partnerships (Indonesia, Malaysia, Thailand) and the franchise model (Philippines).

Opportunities Arising From Covid-19

• While Koufu’s F&B business is fairly resilient with 70% of FY19 revenue from the heartlands, it has also benefitted from increased online deliveries, which formed 5% of FY19 sales.
• Apart from improving its online platform, the group is also exploring the concept of ‘cloud kitchen’ in its upcoming integrated facility, which is on track to open in 2H20F. Management expects the integrated facility to catalyse revenue growth (via rental initiatives) and drive cost efficiencies for the group in the medium term.

Reiterate ADD

• Potential Catalysts: higher-than-expected store wins and synergistic M&As.
• Risks are a second wave of Covid-19 and poor overseas execution.

Source: CGS-CIMB Research - 24 Jun 2020