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Broker's take: PhillipCapital says Koufu a 'buy' on superior growth, potential asset sale

PHILLIPCAPITAL on Wednesday initiated coverage on Koufu Group with a "buy" recommendation and a target price of S$0.80.

The stock gained 1.5 Singapore cents or 2.2 per cent to trade at 68.5 cents as at 1.32pm.

The brokerage has pegged the food and beverage (F&B) play to a price-to-earnings multiple of 18.5 times of FY21 estimates, which is the sector average.

"We view Koufu as best in class with a defensive business model and superior growth profile from its overseas expansion plans and the expansion of their new concepts," wrote senior research analyst Terence Chua in a note. The firm's new concepts are its R&B Tea bubble tea outlets and its premium vegetarian Elemen restaurants.

PhillipCapital pointed to the F&B operator's historical record of generating positive free cash flow, and forecast strong free cash flow of S$25 million a year from FY20 to FY22. 

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The group also has high return on equity, with estimates at 20.6 per cent for FY21 and 22.3 per cent for FY22, Mr Chua said. Its "superior" net margin and highest profit per outlet compared with the rest of the sector - coupled with the cash flow generation capabilities and defensive earnings - place Koufu well above its peers, he added.

Meanwhile, Koufu's robust balance sheet puts it in good stead to ride out the ongoing coronavirus pandemic as well as to take advantage of mergers and acquisitions to grow, according to the analyst.

The Elemen restaurants and Rasapura Masters food court at Marina Bay Sands will continue to be negatively affected by the restrictions on overseas visitors amid the Covid-19 situation.

That being said, as more people in Singapore eat out, Koufu will still benefit from the consumption recovery, Mr Chua wrote.

"We expect the group's move into its new integrated facility in Q3 2020 to be a major catalyst as the group accrues cost savings through improved productivity and operational efficiency," he added. 

Koufu's upcoming facility along Woodlands Avenue 12 will house a larger central kitchen and expand the central procurement, preparation, processing and distribution functions.

There may also potentially be a special dividend arising from the sale of its existing central kitchen properties when the group moves to the new facility, PhillipCapital noted. 

Koufu owns two central kitchens at 18 and 20 Woodlands Terrace, which can either be sold, with the disposal proceeds distributed to shareholders, or used for future expansion plans.

PhillipCapital estimates that a sale of these properties will be priced at around S$10 million, with Koufu realising an S$8 million gain from it. This translates to an additional 1.4 Singapore cents per share in dividends or an additional 2.1 per cent dividend yield.

The Koufu group operates food courts, coffee shops, F&B stalls, kiosks, quick-service restaurants, and full-service restaurants.

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