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Brokers' take: Analysts like Kimly for its attractive dividends, strong food-delivery orders

Kimly coffee shop - CMG file.jpg
Delivery orders have become a new core revenue stream for Kimly, and also mitigated the drop in direct outlet sales, said RHB.

COFFEE shop operator Kimly is a "buy" given the growing revenue stream from food delivery and as acquisitions are set to boost its profitability, said UOB Kay Hian (UOBKH) and RHB in separate reports.

The company's lower price point and heartland presence will also appeal to customers especially as people work from home, and Kimly is likely to continue to reward shareholders with attractive dividends.

UOBKH has initiated coverage on Catalist-listed Kimly with a "buy" call and a target price of S$0.36.

Meanwhile, RHB maintained its "buy" rating and upped its target price to S$0.32 from S$0.29 previously.

The stock rose 1.5 Singapore cents or 5.7 per cent to trade at 28 cents as at 4pm on Monday.

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UOBKH expects Kimly to benefit from the work-from-home trend and as people become more price sensitive amid the coronavirus outbreak, analysts Llelleythan Tan and Joohijit Kaur wrote in a report dated last Friday.

The company is the largest coffee shop operator in Singapore with dozens of coffee shops islandwide, near the homes of the majority of the population.

"The advantages of coffee shop operations include boosted earnings given the proximity to heartlands, where many are working from home, easy access for online food delivery providers and a lower price point due to lower operating costs as compared to malls," the analysts noted.

Besides, as Singapore reopens the economy following the lifting of "circuit-breaker" measures, customers are likely to start dining at Kimly's multiple restaurant brands again, they added.

According to UOBKH, the company's cash-generative business allows for more acquisitions as well as higher dividends.

Kimly has an "impressive" net cash balance of S$69.3 million, which is equivalent to 23 per cent of its market cap, the analysts wrote.

The company has thus been consistently paying out one of the highest dividend yields - estimated at 5.5 per cent for FY20 - as compared to its competitors in Singapore, they added.

The research team finds the stock's valuation "unjustified", considering its strong balance sheet, high net cash position and higher dividend yield than its regional peers.

Kimly shares were trading at 11.1 times FY21 price-to-earnings (PE) ratio, UOBKH noted on Friday. "We believe Kimly should be trading nearer to its regional peers' 2021 PE of 16.5 times," it added.

Meanwhile, RHB analyst Jarick Seet said in a report last Friday that Kimly continues to benefit from the still-high food delivery orders, although there has been a slight dip in orders quarter on quarter.

This was despite crowds returning to its coffee shops following Phase Two of the country's "circuit breaker".

"The net impact still results in an increase in revenue and margins as compared to the pre-Covid-19 period," Mr Seet wrote.

He forecast delivery orders will form about 15-20 per cent of total revenue for FY20.

Delivery orders have become a new core revenue stream for the company as Kimly benefited from the surge in demand from platforms such as Grab and foodpanda. This also mitigated the drop in direct outlet sales.

The popularity of food delivered from Kimly's outlets may be due to the fact that it is one of the most affordable options among food delivery platforms, making it more sustainable for the average family in Singapore in this flagging economy, RHB noted.

In addition, its outlets are spread across Singapore, mainly near or below housing estates, which ensures a wide reach for food delivery, the brokerage added.

Both UOBKH and RHB expect Kimly's acquisitions to spur growth.

The company has started buying more coffee shops, with recent deals completed in the half year ended March 31, 2020.

These acquisitions will help boost future revenue and profits when the assets start contributing significantly in three to five years after the transactions, UOBKH said.

RHB, meanwhile, noted that after the completion of Phase 2B of Kimly's acquisition, its portfolio now boasts some 80 food outlets and 134 food stalls, up 25 per cent and 10.7 per cent respectively since its initial public offering.

Last month, the company also inked two separate joint ventures for two coffee shops in Bukit Batok and Aljunied, which should further boost profitability for FY21, said RHB.

Mr Seet likewise pointed to Kimly's attractive dividend yield, which RHB estimates will come in at about 4.8 per cent for FY20.

RHB increased its estimates for Kimly's profit after tax and minority interests by 14 per cent, which resulted in the higher target price.

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