Broker's take: RHB initiates coverage on Kimly with 'buy'

RHB Research has initiated coverage of local coffee shop and food court operator Kimly with a "buy" recommendation on Monday, citing the defensive nature of the business and its rich cash flows, planned expansions, and mergers and acquisitions in the pipeline.

The broker's target price for the stock is 43 Singapore cents based on a discounted cash flow valuation, translating into a price-to-earnings ratio of 22.8 times for fiscal 2018 - below the peer average of 24 times. The Catalist-listed stock closed at 34 Singapore cents on Friday.

As a provider of staple food to general consumers, Kimly's business is defensive and generative, said RHB analysts, noting that gross margins have been stable at above 20 per cent since fiscal 2014 and are expected to stay around this region.

With the group looking to add up to one to two coffee shops a year and ramp up on its third party brands, the analysts expect at least three to four more additions to its portfolio in fiscal 2018.

While Kimly intends to declare an annual dividend of not less than 50 per cent of net profits attributable to shareholders, suggesting a yield of 2.9 per cent for fiscal 2018F, RHB thinks it "highly possible" for higher dividends to be paid in the near future, citing the group's net cash of S$91 million, positive cash flows for operations of S$7 million to S$8 million a quarter, and estimated capex (capital expenditure) of just S$2 million to S$3 million a year.

Kimly's active seeking of mergers and acquisitions and joint ventures has also led the analysts to believe "that growth would be exciting in the coming years".

Key risks include rise in rental rates and labour shortage, said RHB.