• With Singapore at Phase 2 of the CB, we believe Kimly (SGX:1D0) will benefit from larger crowds going outdoors. Also, the acquisition of four coffee shops, three industrial canteens and a restaurant unit, should contribute positively to its PATMI.
• Despite the impact of COVID-19 on F&B business, Kimly’s defensive qualities are likely to enable it to still enjoy PATMI growth over the next few years.
• Upgrade to BUY from Neutral, with new DCF-backed Target Price of SGD0.26 from SGD0.24, 13% upside and 5% yield.

Back to Its Bread and Butter Business

• Kimly announced a strategic shift to acquire more long-term and direct assets ownership of food outlets and food stalls to increase its revenue stream and reduce risks associated with leasing and tenancy. Management is also streamlining outlet operations and further optimising its central kitchen to improve profitability.
• To enhance front-end outlet efficiency, Kimly 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 commenced the 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.

Attractive Yield of 4.7%

• We expect Kimly’s business to remain durable amidst this pandemic, and it will likely continue to reward shareholders with attractive dividends despite falling slightly for FY20F (Sep) of 4.7%.
• We expect Kimly's dividends to pick up over the next few years as things return to normal for the company post Circuit Breaker (CB).

Attractive Value Proposition

• We think that most of the bad news for Kimly has already been priced in, and valuation at this level seems attractive, being a cash generative and defensive business.
• Despite expecting a weaker 2H20F due to the CB, Kimly's prospects remain positive as Singapore has entered into Phase 2, and will eventually move to Phase 3, where things should eventually return to normal.
• Coupled with a 4.7% yield, we upgrade Kimly to BUY with a higher DCF-backed Target Price of SGD0.26.
• Downside risks to our call include a rise in rental rates, and labour shortage.

Source: RHB Invest Research - 26 Jun 2020