• We expect Kimly to maintain its no.1 coffee shop operation market share in Singapore, with a 2-year core earnings per share CAGR of 47% in FY9/20-22F. Tailwinds from hybrid work-from-home initiatives and growing presence of food delivery services.
• Kimly has a strong balance sheet with 1H21 net cash of S$59m. We initiate coverage on Kimly with an ADD rating and target price of S$0.46, pegged to 16.8x FY22F P/E.
• Catalysts: M&A and faster outlet expansion.

Initiate Coverage on Kimly With ADD and S$0.46 Target Price; Emerging Stronger From COVID-19

• Kimly (SGX:1D0) is one of the largest coffee shop operators in Singapore with 72 coffee shops as at end-Sep 20. We forecast a 2-year core EPS CAGR of 47% in FY20-22F on the back of tailwinds from continued work-from-home (WFH) initiatives, increased popularity of food delivery services and earnings contribution from new acquisition, Tenderfresh.
• Kimly's share price currently trades at ~14x FY22F P/E, below its initial ~25x as at IPO in Mar 2017.
• We initiate coverage of Kimly with ADD at a target price of S$0.46, pegged to 16.8x FY22F P/E (+0.5 standard deviation from average since listing) in view of the group’s favorable growth prospects.

WFH and Food Delivery Here to Stay

• We expect Singapore to continue shifting towards a hybrid WFH model, which should support footfall at Kimly outlets in FY21F/22F due to the group’s dominant presence in the heartlands. Kimly expanded its outlet count from 64 outlets at IPO to 83 outlets as at end-FY20, which includes coffee Tenderfresh, we expect Kimly to report strong revenue growth of 12%/20% y-o-y in FY21F/22F.

Resilient Coffee Shop Operations, Strong Cash Generation

• We like Kimly’s business model as its heartland outlets (~80% of outlets managed as at end FY20) enjoy resilient pandemic.
• As a result of Kimly’s defensive cash generative business, we expect strong operating cash flow (OCF) to continue bolstering free cash flow generation in FY21F/22F, which we expect at S$35/S$78m.

Formidable Balance Sheet to Support Expansion and M&A

• Kimly had a net cash of S$59m as of 1HFY21 (end Mar-21). With the expected acquisition of Tenderfresh (S$38m in cash), we estimate net cash to hover at ~S$20m by end-FY21F.
• The strong balance sheet should continue to allow Kimly to grow organically via outlet expansion and inorganically via acquisitions.
• We expect Kimly to keep a dividend payout of 55%, translating into a decent yield of ~4.0% in FY22F.

• Potential re-rating catalysts include rising employee costs.

Source: CGS-CIMB Research - 18 Jun 2021