Coffee shop operator Kimly started at Buy by RHB on acquisition pipeline

Singapore one dollar bill

RHB started coffee shop operator Kimly at Buy with a S$0.43 target price, citing a combination of defensive operations and the potential for acquisitions.

“Kimly operates and manages coffee shops and food courts locally, which have a defensive nature accompanied by rich cash flows,” RHB said in a note on Monday, noting gross margins have been stable above 20 percent since 2014. “In addition, with M&As in the pipeline, we believe that growth would be exciting in the coming years.”

RHB said it expected Kimly would add one or two coffee shops a year and also operate third-party brands which could add 5-8 percent growth a year over 2019-20. It currently operates and manages 60 coffee shops and four industrial canteens under its own brand and third-party brands as well as four food courts under the foodclique brand, RHB noted.

It said Kimly has great potential as a “consolidator of coffee shops.”

“We understand that the coffee shop industry is highly fragmented in Singapore, with the top four largest players commanding only a 13 percent share of the market,” RHB said. “With the advantages of being listed where it could issue equity to raise cash for M&As, we believe Kimly could actually be the first mover to consolidate the industry by acquiring private coffee shops or its operational rights.”

Management plans a dividend payout rate of not less than 50 percent of net profit, suggesting a 2.9 percent dividend yield for this year, RHB said, but it noted that with the group’s net cash and positive cash flows, that payout could rise.

RHB also noted the stock was trading at a 2018 price-to-earnings ratio of 18.1 times, below the peer average of 24 times.

The stock ended Monday up 2.94 percent at S$0.35.