Kimly Limited vs Koufu Group Limited, Which Is a Better Investment?

Koufu Group Limited, an operator of food courts and coffee shops, made its debut on SGX on 18 Jul 2018 at IPO price of $0.63.

Its industry peer,  d, is also a relatively new company on the stock exchange. It got listed on 20 Mar 2017, at a price of $0.25.

As two listed players with an almost identical business model, it makes an interesting case to compare and contrast their business in a bid to determine which is a better-quality company.

In this article, I will be comparing the FY17 results for both. Kimly’s figures will be obtained from its annual report, while Koufu’s info will be extracted from its IPO prospectus.

Overview

Kimly Limited operates and manages 60 coffee shops and 4 industrial canteens under the ‘Kimly’ and third party brands, and 4 food courts under ‘Food Clique’ brand.

Under its Food Retail division, it has 129 food stalls and 1 Live Seafood restaurant stall by one central kitchen.

Koufu Group Limited has a slightly more diverse business. It operates 48 food courts, 14 coffee shops, 83 Food and Beverage stalls, 20 restaurants and F&B kiosks, 1 hawker centre and 1 commercial mall. Note that Koufu has 4 outlets in Macau too.

Based on its IPO prospectus, Koufu has 17 brands across all its outlets which include the likes of Koufu food court, Gourmet Paradise and Happy Hawkers.

Revenue and Income

In FY 17, Kimly’s revenue stood at $192.1 million, an 11.6% increase from FY16. Food Retail Division constituted 42% of the sales and Outlet Management Division occupied 58%.

Profit after Tax was $21.4 million, an 11.6% drop from FY16.

Hence, Kimly’s Profit after Tax margin would be 11.1%.

Source: Kimly FY 17 Annual Report

As for Koufu, its FY17 revenue was $216.7 million, a marginal improvement of 0.7% from FY16. Outlet and Mall Management contributed 51.4% of sales while F&B retail’s share was 48.6%.

Profit after Tax was $26.8 million, a 3.4% improvement from FY16.

Its Profit after Tax margin would be 12.3%.

Source: Koufu IPO Prospectus

It is clear that Koufu enjoys a larger revenue and Profit after Tax. It seems to be more efficient too, based on a higher margin.

Balance Sheet

As of end FY17, Kimly has Total Assets of $106 million, and Total Liabilities of $32.5 million. Its Total Debt to Asset Ratio would thus be 30.6%.

As for Koufu, its Total Assets is $107 million while Total Liabilities is $64.1 million. Hence the Total Debt to Asset Ratio would be 59.9%.

It is worth noting that Kimly has zero debts and borrowings on its balance sheet, while Koufu has $1.75 million in debts. However, with its Cash & Equivalent balance of $53 million, Koufu’s borrowings is not a cause for concern.

Overall, Kimly seems to be in a better shape as far as the balance sheet is concerned, with its lower Debt to Asset Ratio and zero debts. However, Koufu’s balance sheet is healthy too, with a not too high Debt to Asset Ratio and a small amount of borrowings that can be easily paid off.

Cash Flow

In FY17, Kimly generated a Net Operating Cashflow of $29 million. As a percentage of its Profit after Tax ($21.4 million), it is more than 100%. Kimly fared well here as each dollar of its Profit after Tax is backed by more than one dollar of actual cash inflow generated by daily operations.

Koufu’s Net Operating Cashflow was even higher at $50.1 million. Amazingly, the cash flow is almost twice the amount of Profit after Tax ($26.8 million).

Both companies can be said of generating a healthy amount of cash flow as far as FY17 is concerned.

Future Growth

F&B business is a challenging one primarily due to rising costs and intense competition. Indeed, there are plenty of eateries in both the heartland and city area offering a diverse range of options to consumers. To those who dine often in coffee shops or food courts who are Kimly and Koufu’s key target audience, the price would be a key determinant to their dining decisions.

Both companies cited similar growth strategies. Firstly, strategic expansion to gain greater market visibility while concurrently refurbishing existing outlets where possible. In this aspect, Koufu may have an edge as it already has one foot in Macau while Kimly is purely a local play.

Next would be to improve productivity and via innovation and automation. Both companies are moving into electronic payment which I have seen in Kimly coffee shops that accept digital wallet such as Pay Lah. There are also other measures to lower cost, such as the smart tray return robots seen in some of Koufu’s food courts.

Online food ordering and delivery service is another area. Koufu plans to roll out such service to all of its outlets by 2019, while Kimly has already embarked on this since late 2016.

Lastly, recognising the importance of an integrated facility in supporting a large number of food stalls, both operators are pumping in the capital on this front. Kimly is expanding its central kitchen to double its production output, while Koufu is building a new integrated facility that will also house its Training and Research Development Centre.

Valuation

Kimly’s Earnings per Share is 2.07 cents while Koufu’s adjusted EPS after IPO and issuance of Cornerstone Shares is 4.83 cents. Based on the share closing price of 23 Jul, Kimly’s PE ratio is 16.9x while Koufu’s PE is 12.9x.

Conclusion

Koufu Group Limited have larger revenue, higher earnings with a better profit margin. However, it has a weaker balance sheet than Kimly, although, by all measures, its gearing is considered healthy too. Koufu generates more operating cash flow by virtue of its larger sales, and is trading at a lower earnings multiple.

While this simple exercise seems to suggest that Koufu would make a better investment, it is by no means conclusive. With both companies’ business being very similar, it is down to a better execution of its growth strategy.

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