Broker's take: DBS upgrades Koufu to 'buy' on expected rise in food court footfall with phase two reopening

DBS Group Research, in a note on Monday, upgraded its rating on Koufu Group to "buy" from "hold" and raised its target price to 75 Singapore cents from 68 cents amid expectations of higher footfall at its food courts, as dining in becomes permitted once more during the upcoming phase two easing of Singapore's "circuit breaker".

Koufu shares were trading at 67 cents as at 10.44 on Monday, up 1.5 cents or 2.3 per cent.

DBS Group Research analysts Alfie Yeo and Andy Sim raised the FY20-21 forecast earnings for the food court and coffee shop operator by a "marginal" 1 to 5 per cent as safe distancing measures and customer limits would likely still be in place.

They upgraded the stock "in anticipation of better demand and attractive valuations".

"Koufu operates in the mass market segment and will benefit from higher sales from more transactions as diners return to its food courts and bubble tea outlets located in malls, schools and offices," they wrote.

"Our forecasts are now in line with consensus, having factored in phase two of the 'circuit breaker' recovery."

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Potential catalysts for the stock include a strong post-pandemic recovery, and special dividends from the sale of Koufu's existing central kitchen property before it moves into its new integrated facility aimed at delivering economies of scale.

Longer-term drivers include the setting up of the integrated facility and overseas growth from its two food courts in Macau.

Meanwhile, CGS-CIMB on June 12 initiated coverage of the stock with an "add" call and a target price of 86 cents.

Analyst Ngoh Yi Sin cited the food and beverage (F&B) player's "resilient business, strong cash flow generation, superior net margins and return on equity".

Other factors include a "robust" expected recovery for FY21-22.

Koufu is expected to remain profitable for FY20, thanks to S$10 million in budget support and some three months' rental relief from landlords, Ms Ngoh wrote.

She projected an earnings growth of 13.6-52.5 per cent for FY21-22, "underpinned by pent-up demand for dining out and store expansion".

She also pointed out the stock's "decent" dividend yield of 2.2-3.9 per cent for FY20-22, with upside potential from the sale of its two central kitchens.

Ms Ngoh said Koufu boasts more defensive earnings compared to other F&B players, given its geographical concentration in the Singapore heartlands.

"We believe hawker fare will remain an integral part of Singapore culture, given that 80 per cent of the population resides in public housing and more people are choosing to eat out and more healthily," she said.

"With the government pledging to increase the supply of hawker centres and food courts, we think these could be favourable for Koufu, given its established track record in store wins. Ongoing industry consolidation could also present some M&A (mergers and acquisitions) opportunities for the group."