SINGAPORE (May 17): UOB Kay Hian has initiated coverage of coffee shop operator Kimly with a “hold” call and a target price of 48 cents.
“While we like the group for its strong cash generation capabilities and clean balance sheet, we believe most of the positives have been priced in,” says UOB lead analyst Thai Wei Ying in a retail report on Wednesday.
According to Thai, Kimly is offering an above-average FY17F and FY18F FCF Yield of 4.4% and 6.3%, respectively.
The coffee shop chain is expected to be hit by higher effective tax rates of 13% for FY17 upon restructuring, but stable growth is expected from FY18.
Thai projects a three-year net profit CAGR of 1.7% for FY17-19 on the back of a steady increase in the number of outlets managed and food retail stalls.
“We remain optimistic of the group’s business outlook which is bolstered by a strong management team and resilient industry trends. Meanwhile, we believe potential M&As could add another leg of growth for Kimly,” Thai says.
In addition, Thai points to Kimly’s beverage business comprising 64 stalls as a “massive cash cow”.
Highly cash generative, the group’s beverage business provides daily cash flow and ensures the viability of the entire food outlet, according to Thai.
Kimly has a history of strong operating cash flow, and was in a net cash position as of FY16. Operating cash flows are expected to remain resilient at $28.1 million and $29.0 million by FY17 and FY18, respectively.
“With its existing clout of 5.8% market share, Kimly is in an advantageous position to consolidate the industry. Furthermore, being the only listed coffee shop operator in Singapore would furnish Kimly with not just a war chest but also acquisition currency in the form of equity,” says Thai.
As at 3.40pm, shares of Kimly are trading half a cent higher at 44.5 cents.
