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Koufu share rally may have legs still as it seeks new growth

Foodcourt operator Koufu may have seen its share price pick up this year, but is there more room for the stock to rally?

FOODCOURT operator Koufu may have seen its share price pick up this year, but is there more room for the stock to rally?

Some analysts seem to think so based on their projection of earnings growth for this year.

Pointing to Koufu's strong cashflow generation ability and significant cash hoard of S$98.7 million as at 1Q19, UOB Kay Hian analysts Joohijit Kaur and John Cheong said in a report: "The market has not fully appreciated Koufu as the most-profitable listed food & beverage (F&B) company." UOB Kay Hian has a target price of S$0.95 cents for the stock.

They expect Koufu to deliver earnings per share growth of 19 per cent this year, thanks to full-year contributions from its Rasapura food court, the ramp up of new outlets and the roll-out of additional R&B Tea outlets.

Koufu shares on Monday closed at S$0.74, down half a cent. The stock had climbed to a high of 81.5 cents in April this year.

DBS Group Research analysts Alfie Yeo and Andy Sim also expect FY19 earnings to improve on the back of contributions from new R&B Tea and Supertea kiosk outlets, higher sales efficiency and relatively lower operating expense. DBS has a target price of S$0.85 on the counter.

Even as it expands at home, the foodcourt operator is seeking to grow its footprint in new markets. Earlier this month, it announced that a subsidiary had entered into a joint venture to take the Supertea and R&B Tea brands to Indonesia by the third quarter of this year. Koufu has a 32.4 per cent stake in the JV through its subsidiary.

The JV could give earnings a slight boost of 1-2 per cent in FY2020, UOB Kay Hian analysts said, assuming expansion takes place at a similar clip to Singapore.

Since setting up its first tea outlet in Singapore in the third quarter of 2017, Koufu has grown it to a chain of 17 R&B Tea and one Supertea outlets here as at June 30, with the business expected to contribute profits this year. It is worth noting that while Koufu is looking to ramp up the number of outlets it has, competition in the F&B industry remains keen.

Its joint venture plans to debut the brands in Grade-A malls in Jakarta before progressively scaling up across the rest of the country. Koufu, which has already in Macau with its first R&B Tea and Supertea outlets, is also in talks to enter other markets such as Malaysia and the Philippines.

Aside from Singapore and Macau, Koufu has been granted the rights to sell the R&B Tea and Supertea brands in Malaysia, Indonesia, Myanmar and the Philippines.

Meanwhile, at home, retail sales for "other eating places" - such as food courts - have seen a recovery this year after suffering declines in 2017 and 2018, which bodes well for Koufu. This comes as GDP growth has weakened, prompting penny-pinching consumers to seek more affordable dining options such as coffeeshops, foodcourts and hawker centres, pointed out the DBS analysts.

Special dividends from the potential sale of its existing central kitchen was also cited by analysts as a possible catalyst to its share price. It is due to shift to a bigger, 20,000 square metre facility at Woodlands next year, and plans to divest its existing central kitchen.

One challenge that analysts are keeping a wary eye on is rising labour costs, as tightening foreign worker quotas for the services industry kick in from Jan 1, 2020.

Still, the food court operator has been turning to automation - by introducing smart tray return robots, mobile ordering apps and piloting a traditional coffee-making machine - which could help to mitigate the impact of the labour crunch.