Kimly’s initial public offer (IPO) back in March 2017 was well-received by investors with total valid applications amounting to 1.4 billion new shares for 173.8 million shares offered (comprising 170 million placement shares and 3.8 million offer shares) and the offer was approximately 8.3 times over-subscribed. Now coming six months post the offer, we think that it is about time we assess how this coffee shop operator has fared over the period.
Lifted by popular demand but limited number of new shares available for allocation, Kimly’s share price surged 76 percent on its first trading day closing at $0.44 on 20 March, with a total of 108.5 million shares changing hands. Nonetheless, the momentum did not last and was followed by a series of gradual retracement inching towards its offer price of $0.25 per share. As of 25 September, current market price of $0.37 represents a correction of close to 15.9 percent from its first-day surge. Is now a good time for investors who are unsuccessful in their offer application to accumulate the stocks?
Defensive Business But Lacks Competitive Edge
Kimly is the largest traditional coffee shop operator in Singapore with 26 years of experience, and its revenue is derived from two core businesses segments – namely its outlet management division and food retail division which account for 56.6 percent and 43.4 percent of its FY16 revenue respectively. The group operates and manages an extensive network of 64 food outlets and 121 food stalls as of September 2015, and has added into its portfolio another three coffee shops and 13 food stalls ever since then.
Kimly’s core businesses are generally more defensive in nature, as it provides affordable food solutions across the heartlands of Singapore. In addition, the group gets to enjoy strong cash flow through leasing of stalls to other tenants by being the master leaseholder.
In spite of that, the food and beverage industry is a highly competitive one and barriers to entry are low. Kimly faces stiff competition from other coffee shop operators with more established groups including Kopitiam Group, S11 F&B Holdings, Chang Cheng Group and Broadway Group. Based on the number of outlets, Kimly’s market share is estimated at only around 5.8 percent. We feel that the group does not possess a distinctive competitive edge to differentiate itself from the rest. In fact, Kimly’s unsuccessful tender for renewal at the Ngee Ann Polytechnic food court could be an example of the challenges experienced by the group to protect its business.
Strong Cash Generating Ability With Cash Hoard
We like Kimly’s history of strong cash generating capabilities from its operations. For the last few years, the group has been able to generate positive operating cash flows above $20 million consistently.
Augmented by the IPO proceeds of approximately $40.9 million, Kimly holds cash and bank balances of $76.6 million in its balance sheet as of 30 June 2017 with zero debts. The net cash of $76.6 million constitute around 81 percent of its total assets, giving the group plenty of headroom and financial muscles for potential acquisitions and inorganic growth.
Furthermore, Kimly’s financial leverage is also healthy with debt-to-equity ratio coming in at 0.4 times as at June 2017.
Declining Earnings Raise Concerns
Despite 9M17 revenue rising 12.4 percent to $142.2 million year-on-year, gross profit merely climbed 5.1 percent to $29.3 million owing to a 14.4 percent increase in cost of sales. The higher cost of sales was largely due to an increase in employee benefits expense as well as operating lease expense. As such, gross profit margin was squeezed and dipped from 22 percent to 20.6 percent.
Meanwhile, administrative expenses jumped 31.9 percent mainly attributable to higher employee benefit expenses for management personnel and higher depreciation of property, plant and equipment. Together with a more-than-doubled tax expense arising from the absence of partial tax exemption and relief enjoyed prior to the restructuring exercise, net profit sank 14.1 percent to $16.5 million.
Management guided that the outlook remained challenging given the labour-intensive nature of its business, but will continue to manage its cost and manpower to improve productivity. Apart from that, other growth plans such as the online food ordering and delivery system seem unlikely to do much in raising the bottom-line in the near term.
Unattractive Yield Puts Income Investors At Bay
Kimly declared an interim dividend of $0.0028. With 1H17 earnings-per-share at $0.0115, the dividends represented a payout ratio of 24.3 percent. This fell short of the expectations at the time of IPO when management indicated its intention to pay dividends of not less than 50 percent of net profits to shareholders. Assuming another final dividend of an equal amount, this would translate to a yield of 1.5 percent based on current market price of $0.37, or 2.2 percent based on the offer price for IPO subscribers. The seemingly low yield now appears rather unattractive to income investors who are looking forward to a yield of around four percent.
In comparison to its peers in the F&B industry, the sector as a whole pays out an average yield of around 3.2 percent. In that aspect, it looks as though Kimly is still not rewarding its shareholders sufficiently with its payouts.
As of 25 September, Kimly’s share price at $0.37 implies a price-to-earnings (P/E) ratio of 17.7 times and a price-to-book (P/B) ratio of 6.4 times. Although the group’s earnings multiple does make it stand out among its counterparts, it is definitely not cheap in terms of valuation based on assets with its P/B ratio standing at almost twice that of the industry’s average. At this moment, we would prefer to err on the side of caution given that the moratorium period is expiring in September and Kimly may likely face another wave of selling pressure if there are reasonable numbers of controlling shareholders or directors looking to cash out on their holdings. In light of the challenging outlook of the F&B industry as well as Kimly’s rich P/B valuation, we think it might be a better idea to sit out for the time being while waiting for a more attractive opportunity to present itself.