Broker's take: Koufu's Deli Asia deal will 'bring in the dough', CGS-CIMB says

THE proposed S$22 million acquisition of the Deli Asia group by food court and coffee shop operator Koufu Group is an "attractive" deal that could boost the mainboard-listed company's earnings per share, a CGS-CIMB research report said on Wednesday.

The Deli Asia group, comprising Deli Asia, Delisnacks, Dough Culture and Dough Heritage, is one of Koufu's biggest suppliers of fried food and dough products.

CGS-CIMB reiterated its "add" call on Koufu and maintained its target price of 86 Singapore cents.

The target price is based on a 19 times estimated FY21 price to earnings ratio, which is at a 15 per cent discount to the sector average of 22 times, analyst Ngoh Yi Sin said.

The stock offers a 3 per cent dividend yield, and currently trades at 15.2 times its estimated FY21 price to earnings ratio (P/E), making it "one of the cheapest F&B players in the region", she added.

Shares of Koufu were trading at 71 Singapore cents as at the midday break on Thursday, up 1.5 cents or 2.2 per cent.

Ms Ngoh noted that the Deli Asia group recorded a S$2.8 million profit before tax and net profit of S$2.4 million in FY19.

She expects the deal to be completed by the end of this month, subject to the fulfilment of all conditions and undertakings. Assuming the deal is completed by end-July, Ms Ngoh forecast a 5 per cent upside to CGS-CIMB's estimate of Koufu's earnings per share for FY20, and an 8 per cent upside to the FY21 estimate.

"At 9.2 times the implied FY19 P/E, we think this is an attractive acquisition," she said.

Ms Ngoh added that the proposed acquisition will complement Koufu's product offering and strengthen its supply chain. Further synergies can be reaped from the consolidation of manufacturing facilities and potential expansion of distribution channels, she added.

She expects Koufu to reap rental cost savings from the planned relocation of Deli Asia group's production facilities and warehouse into Koufu's upcoming integrated facility later this year.

Proposed acquisition aside, CGS-CIMB continues to like the stock for its earnings growth, net cash position (S$85.7 million as at end-FY19) and cash-generative business, Ms Ngoh added.