Is Koufu Group Ltd the Food and Beverage Company to Own?

Koufu Group Ltd (SGX: VL6) is one of Singapore’s largest owners and operators of food courts and coffee shops. 

With Singapore under Circuit Breaker measures currently, food courts or coffee shops must be one of the few places that locals frequent often. Many would have visited Koufu food court or some other food kiosk operated by the company. 

In this article, we shall take a closer look at Koufu’s business segments, financial earnings, and its competitive edge over its peers. 

Business Overview 

Koufu owns a variety of food establishments split into two business segments: Outlet & Mall Management, and F&B Retail. 

Under the Outlet & Mall Management segment, Koufu manages food courts, coffee shops, a hawker centre, and a neighbourhood mall. 

F&B Retail segment includes self-operated food stalls and kiosks found in self-owned and third-party food courts, as well as quick and full-service restaurants.

Both segments take up an equal share of Koufu’s total revenue. 

Koufu adopts a multi-brand strategy to connect with consumers at different price points and preferences. For example, under food courts, there are Koufu that serve affordable local delights to heartland residents; Cookhouse, premium food courts in commercial areas with distinct dining experience; and Rasapura Masters at Marina Bay Sands that showcases Asia’s gastronomic offerings. 

As of end-2019, Koufu operates more than 170 food establishments in Singapore, Malaysia, and Macau. 

Source: FY2019 Annual Report

Latest Financials 

Koufu had a good year in 2019. Revenue continued its growth trend by posting a 6.1% rise to $237.5 million. Both business segments recorded a modest increase of 6.9% and 5.3% each. The growth was mainly due to the opening of new outlets and overall higher sales from existing outlets. 

Source: FY2019 Earnings Presentation

Koufu made good progress in its multi-brand expansion. Its tea beverage brands, R&B Tea and Supertea, opened 18 kiosks during the year which brings the total outlet count to 26. A second food court started operating in Macau University.  

Profit before tax rose 15.6% to $34 million, with profit margin improving to 14.3%. 

Cash generated from operations amounted to $110.1 million, a big jump from $33 million in the previous year. 

Historical Earnings

Koufu has a strong track record of growing its top line and bottom line. As seen below, revenue increased at 3.3% per annum from 2016 to 2019, while profit before tax expanded at 3.6% annually over the same period. The group was able to do so while strengthening its profit margin. This is no mean feat as food and beverage (F&B) players typically have a thin margin due to high manpower and rental cost.  

Source: FY2019 Annual Report

The revenue growth was broad-based across both business segments, with a sharp increase in margin for the Outlet & Mall Management segment to 16.3%. However, F&B Retail margin was lower in 2 out of the 4 years, possibly due to stiff cost pressure. 

Source: FY2019 Annual Report

Cash Flow and Balance Sheet Strength

Koufu has generated positive operating cash flow in the past four years. Notice that the cash amount is close to the pre-tax earnings, indicating that it has a healthy business. The jump in FY2019 cash flow is due to the adoption of new financial reporting standards. 

Source: FY2019 Earnings Presentation

As of 2019, the group has sufficient cash to pay for all its interest-bearing loans. Its liability-to-asset ratio stood at 0.70 times.  

Strengths

Koufu has a dominant position as one of the largest food court operators locally. Using its diversified brands of complementary dining offerings in the form of food stalls, self-service kiosks, and restaurants, Koufu can cast a wide net to capture all segments of the target market. 

One can observe Koufu’s business strength when we compare its operating margin with industry peers namely Kimly and Breadtalk Group. Koufu’s pre-tax margin for FY2019 is 14.3%, whereas the same figure for Kimly and Breadtalk is 11.5% and 1.1% respectively. It is clear that Koufu is more efficient in running its operations and earns more for every dollar of revenue. 

Another unique strength of Koufu’s business is that it manages Punggol Plaza, a neighbourhood mall with 50 retail outlets. While it is not a big portion of revenue, it gives Koufu a competitive edge in space and staff management. As a landlord, Koufu has free reign to test new technology or food court management techniques here, before network-wide implementation. In this manner, there is a higher success rate which gives rise to Koufu’s superior food court management efficiency.   

Weakness

Koufu’s main weakness is a common issue that faces all F&B players – the competitive cost structure. In FY2019, property rentals and staff costs made up 40% of the total expenses. The group has to constantly manage the two biggest expenses via technology adoption, raising staff productivity, or move up the F&B value chain to offer more premium products. 

Koufu is expanding internationally into new markets such as Indonesia, Thailand, and the Philippines. It is often tricky to move into a new market due to unfamiliarity with government regulations, and fast-changing consumer tastes. Expenses may over-run and result in operating losses. Management will need to tread this path carefully.  

Management and Shareholding

Koufu’s founder, Mr Pang Lim, has been involved in the F&B industry for close to five decades. He once worked as a hawker selling fruits and nasi lemak, and opened his first coffee shop in 1990. 

He founded Koufu in 2002 when the food court landscape was already dominated by several major players such as Kopitiam and Food Junction. Under his leadership, Koufu grew to its scale today with an international presence. 

He currently leads the company as the Executive Chairman and CEO and holds 77% of the total shareholdings

Conclusion

Koufu’s shares are currently trading at $0.62 with a price-earnings ratio of 12.4 times. With a 2.5 cents dividend per share, the yield is 4%. 

I find that Koufu is a unique F&B company with diverse brands that cater to varied consumer segments at different price points. Its food courts and coffee shops are well-run with a strong profit margin. Management is expanding into overseas markets at a moderate pace thus far, without compromising the earnings margin.

Coupled with a decent valuation and yield, this could be a suitable company for investors who like a stable business that gives good dividends. 

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