Brokers’ take: CGS-CIMB downgrades Kimly to ‘hold’, expects lower heartland footfall amid return to office

CGS-CIMB on Friday (May 13) has downgraded its call on coffeeshop operator Kimly Group to “hold” from “add”, as Singapore’s reopening will likely impact footfall as workers start to return to office.

The research team lowered its target price to S$0.41 from S$0.54. The new target price is pegged to 15.4 times CGS-CIMB’s estimates for FY2023 earnings, down from 16.8 times previously to account for the group’s slowing growth prospects.

The target price also implies a potential upside of 6.5 per cent from Kimly’s share price. The counter was trading at S$0.385 as at the midday break on Friday, up S$0.005 or 1.3 per cent.

With working from home no longer the default, CGS-CIMB believes that Kimly will experience lower footfall since the bulk of Kimly’s outlets are located in residential heartlands.

However, the brokerage said the drop in traffic could be cushioned partially by rising inflation, as consumers move towards mass-market dining options.

The removal of dine-in group size limits should also benefit zichar and drink store sales.

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The research team lowered its estimates for Kimly’s FY2022 earnings per share (EPS) by 8.7 per cent to factor in further margin compression from rising food costs, staff expenses and utilities expenses in H1.

“While pricing adjustments have been made in Q2, we think those could be insufficient to cover the continued cost elevation in recent months,” said CGS-CIMB.

The research team also lowered its EPS estimates by 16.8 per cent in FY2023 and 13 per cent in FY2024, to reflect lower store count assumptions, after the operator closed 12 underperforming food stalls.

Additionally, CGS-CIMB noted that Kimly is terminating the management agreements of 9 coffee shops under a third-party brand around the second half of 2022, which may hit revenue of its outlet management segment by about 5 per cent in FY2023.

The coffeeshop operator on Wednesday posted a net profit of S$18.5 million for its first half ended March, declining 14.7 per cent year on year. The decline comes despite its revenue increasing by 27.9 per cent to S$156.9 million, as revenue contributions in some segments fell and cost of sales increased in H1 2022.