Kimly started at Buy by DBS on Tenderfresh acquisition

Kedai Kopi, a Singapore-style coffee shop from Kimly, with a Tenderbest outlet, located at Haig Road in Singapore’s Geylang neighborhood. Photo taken October 2021Kedai Kopi, a Singapore-style coffee shop from Kimly, with a Tenderbest outlet, located at Haig Road in Singapore’s Geylang neighborhood. Photo taken October 2021

DBS Group Research started Singapore-style coffee shop operator Kimly at Buy with a S$0.50 target price, citing the acquisition of the Tenderfresh Business, which the bank expects to begin contributing to earnings in fiscal 2022.

In October, Kimly acquired a 75 percent stake in the Tenderfresh Business, which includes central kitchens, restaurants, kiosks, food stalls and customer relationships, for S$54 million.

The Tenderfresh Business manages 14 concepts and 42 outlets, including local cuisine, Western food, kiosks, catering, retail outlets and original equipment manufacturing (OEM), as well as operating a Halal-certified central kitchen. The central kitchen offers catering to around 140 brands and outlets, supplying semi-finished products to its own outlets and to meet OEM demand for customers in Singapore.

DBS said Kimly can leverage Tenderfresh’s Halal market positioning to reach out to Singapore’s Muslims, who make up 14 percent of the city-state’s population.

“Synergies expected from the acquisition include cross-selling and streamlining of processes,” DBS said in a note Thursday.

The bank forecast the food retail segment would see a 22 percent revenue compound annual growth rate (CAGR) over 2020-2023.

In addition, DBS said it expected more acquisitions would drive further earnings upside.

“While we are conservative on the expansion in food outlets (+5 in FY21F and +4 in FY22F), as we understand that there is a limited supply of long-term leasehold coffeeshop properties for sale or lease, there could be further upside to our estimates if Kimly can deliver more acquisitions by using its strong balance sheet to fund inorganic growth,” DBS said.

DBS said Kimly’s shares are trading at 12 times 2021 price-to-earnings, below its five-year average of 15 times.

“We think that valuations are undemanding based on its position as one of the largest traditional coffee shop operators in Singapore,” the note said, adding it projected earnings per share (EPS) CAGR of 21 percent over 2020 to 2023.

“With its new 75 percent stake of the Tenderfresh business and rapid growth in the food delivery segment, investors can look forward to an earnings acceleration,” DBS said.

DBS also cited work-from-home, which may become a new norm, as a positive for footfall and delivery at Kimly’s food stalls, which are located in Singapore’s “heartlands,” around public housing (HDBs), and can cater to an “increasingly large pool of the WFH demographic.”

Kimly operated 72 traditional, or Singapore-style, coffee shops — which somewhat resemble food courts — as of September 2020, as well as seven industrial canteens and four food courts/restaurants, DBS noted.

Management risk

However, DBS cited a key risk from management continuity and succession planning.

Earlier this month, Kimly’s Executive Chairman Lim Hee Liat and Executive Director and CEO Chia Cher Khiang informed the company’s board that the Commercial Affairs Department (CAD) of the Singapore Police Force notified them they have each been charged with an offence under the Securities and Futures Act. Both Lim, age 55, and Chia, age 47, will resign as directors, and both were requested to temporarily remain as employees to assist in management transition.

DBS said it didn’t expect the charges and subsequent enforcement action to affect its estimates and long-term growth projections.

Shares of Kimly ended Thursday up 10.67 percent at S$0.415.