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Brokers' take: UOB Kay Hian, Lim & Tan Securities initiate coverage on Koufu with 'buy'

BROKERAGES UOB Kay Hian and Lim & Tan Securities have both initiated coverage on Koufu Group with "buy" calls due to the food court operator's growth prospects. Lim & Tan Securities has a target price of S$0.85, while UOB Kay Hian - more bullish in its assessment - has a target price of S$0.95.

In a report, UOB analysts Yeo Hai Wei and John Cheong said that they believe "the market has overlooked key growth vectors with regard to Koufu’s expansion plans, while concerns over headwinds in the food court business are overblown".

"At current valuation, the stock is a steal for a company with solid niche leadership in a potential high-growth high-margin business."

Meanwhile, Lim & Tan noted that Koufu stands to gain from the rising trend of dual-income households in Singapore, which implies that there will be higher spending by households on the consumption of food.

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Koufu also has an extremely robust cash collection/revenue generation model, which provides the capacity for further growth, Lim & Tan added.

Given that global economic growth is slowing down due to ongoing US-China trade issues and Brexit, gross domestic product in Singapore is likely to dip. With that in mind, the brokerages noted that the defensive nature of Koufu's business, which is mostly transacted in cash terms, would be a good pick in such an economic climate.

The brokerages also believe that a bump up in dividends for stocks in Koufu may also be on the cards since Koufu has started on the automation of its operations, cashless payment systems and partnering food delivery businesses.

Special dividends might also come in the form of proceeds from the sale of its two existing central kitchens after its integrated facility start operations in the first half of 2020. Those proceeds may also be re-invested.

Risks to UOB Kay Hian's view are the failure to renew leases, an inability to secure new outlets, a departure of key tenants and food stalls, changing consumer preferences, higher-than-expected competition, and execution risks on its expansion plans.