• Koufu (SGX:VL6) is acquiring a traditional fried food and dough products business for S$22.04m in cash, which could add 5%/8% to our FY20/21F EPS.
• At 9.2x implied P/E, we think this is an attractive acquisition as it complements Koufu’s product offering and strengthens its supply chain.
• Further synergies could also be reaped from the consolidation of manufacturing facilities and potential expansion of distribution channels.

Acquiring Traditional Fried Food and Dough Products for S$22.04m

• Koufu announced that it will be acquiring Deli Asia, Delisnacks, Dough Culture and Dough Heritage (collectively known as the “target group”) for a cash consideration of S$22.04m. Apart from manufacturing traditional fried food and dough products, the target group is also involved in the supply of frozen and partial fried food products to third-party businesses (under Delisnacks brand), as well as the retail of fried food and dough products (under Dough Culture brand).
• We expect the deal to be completed by end-Jul, subject to the fulfilment of all conditions and undertakings (minimum net working capital of S$2.5m and net asset value of S$7.1m on a consolidated basis).
• Two of the vendors, who each have over 25 years of F&B experience, will also enter into a one-year service agreement with Koufu and stay as consultants for another year.
• The target group recorded S$2.8m PBT and net profit of S$2.4m in FY19. Assuming the deal is completed by end-Jul, we estimate 5%/8% upside to our FY20/21F EPS.
• At 9.2x implied FY19 P/E, we think this is an attractive acquisition.

F&B Network Expansion and Added Resiliency

• There are 60 franchised F&B stalls at coffee shops and hawker centres operating under the Delisnacks brand, and seven retail kiosks in Singapore under the Dough Culture brand, which also sell related products including Chinese desserts and drinks. Management plans to expand the retail kiosks to at least 20 in Singapore over the next five years.
• As a hot food business that caters mainly to the mass consumer take-away market, the target group has proven to be relatively resilient during the Covid-19 circuit breaker.
• We expect some rental cost savings as the target group relocates its production facilities and warehouse into Koufu’s new integrated facility (in 2H20F).
• Through the supply of frozen and partial fried food products, Koufu could also access new distribution channels, including supermarkets and exports to overseas markets

Reiterate ADD

• Apart from the accretive acquisition, we continue to like Koufu for its earnings growth, net cash position (S$85.7m as of end-FY19) and cash-generative business.
• Reiterate ADD with an unchanged S$0.86 Target Price, based on 19x FY21F P/E which is at a 15% discount to the sector average of 22x.
• The stock offers 3% dividend yield and currently trades at 15.2x FY21F P/E, one of the cheapest F&B players in the region.
• Catalysts: more store wins, synergistic M&As and better-than-expected execution of its upcoming integrated facility.
• Downside risks to our ADD call are a second wave of Covid-19 and poor overseas execution.

Source: CGS-CIMB Research - 1 Jul 2020