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Hawker centres and food courts are an important part of Singapore’s food culture. You go into one of the food centre and will be spoilt for choice of all the delicious local food which comes at a rather affordable price. Now would you want to own a piece of this business that all Singaporeans know about?
Koufu Group Limited, which is
known for their food courts, has lodged its prospectus with Monetary Authority
of Singapore for its initial public offering on 18 July 2018 with the main
board of the Singapore Exchange. The public offer closes at noon on 16 July
2018.
Understanding its Business
Koufu is an established company
in Singapore F&B and food service management industry for 16 years since
2002. They provide competitive-priced dining options and is supported by local
food consumption habits and therefore, is believed to be resilient through
economic cycles. It main operation is in Singapore while having a small
presence in Macau. As at FY2017, 92% of its revenue is generated from Singapore
while 8% is from Macau.
The total fund to be raised is $43m and it will be intended for the following purpose:
- ($30m or 66%) Build a larger central kitchen that is five times bigger than existing central kitchens to enhance productivity and operational efficiency. Also with spare capacity, they could utilise it to manufacture and supply semi-finished or finished food products to stall operators as well as third party businesses, providing another source of revenue
- ($8m or 18%) Refurbish and renovate existing F&B outlets in order to maintain the suitability of use and encourage repeated patronage
- ($5m or 11%) Expand and strengthen their presence with new F&B outlets in Singapore and overseas with a focus on hospitals, commercial malls, tertiary educational institution and new housing estates. Their current plans was to open 1 food court at Sengkang General and Community Hospital, 2 new food courts in Tampines and Bukit Batok. They also intend to expand their overseas footprint with an initial focus on Macau.
- Joint venture opportunities such as investing in a business to business bakery to expand into the bakery, confectionary and hot kitchen food production business.
- Roll out online food ordering and delivery services to most of their F&B outlets
As stated in its prospectus, Koufu business is
separated into 2 main segments- outlet & mall management (O&M) and
F&B retail business. Each business segment represents roughly 50% of Koufu
FY2017 revenue.
O&M Business- Under its
O&M business, Koufu operates and manages:
- 47 food courts (Singapore)
- 14 coffee shops (Singapore)
- 1 hawker centre (Singapore)
- 1 commercial mall - Punggol Plaza (Singapore)
- 1 food court (Macau)
Below are the brands that Kofu
currently operates.
Related parties transactions
The existing corporate structure
is shown as below. Koufu main shareholder is Jun Yuan Holdings Pte Ltd ("Jun Yuan"), owned wholly by Mr. Pang Lim and Mdm. Ng Hoon Tien, who is also the executive director of Koufu.
Prior to the listing, these are
some of the transactions that took place that might be of interest to investors:
·
28/9/17 - Koufu sold a property with net book
value of $357k to Jun Yuan
· 28/9/17 – Koufu sold 1 food court and 5
coffee shops to Jun Yuan. This was rented back to Koufu at a current rate of
$268k/mth. The rental will be renewed every 4 years and the rental rate will be
determined by an independent valuer with Koufu having to pay either (a) at the
market rental value, or (b) at a rental below the market value.
· The amount paid by Jun Yuan to Koufu was subsequently
returned back to Jun Yuan via a dividend payout in FY2017.
Due to the above transactions, Koufu total
assets has dropped by 42%, from $187m in FY2016 to $107m in FY2017. As the transaction took place
prior to listing, this will not affect my assessment of its valuation. However, there
might be some impact from the "sales and leaseback" agreement of the 1 food court and 5 coffee shops with Jun Yuan as it is on a recurring basis. This
transaction might result in a 2.5% increase in property rental expenses (from
$95.9m to $98.3m) for FY2018, assuming the properties were owned by Koufu
previously with no rental payment needed.
After the IPO, Jun Yuan will continue to hold 78.7% of the company while conerstone investors will own 3.8% of the company. It is to note that cornerstone investors are not subjected to any lock-up restriction in respect of their shareholding interest. This means they are free to sell their shares on the 1st day of trading.
Financial Performance
Based on FY2017, Koufu growth has been quite stagnant at CAGR of 2.94% for the past 3 years whereas Kimly was at 7.2%. However Koufu was more profitable with gross and profit before tax margin higher than Kimly. Koufu staff cost was also way lower than Kimly with staff cost/revenue at 17.16% as compared to Kimly 26.15%. This means that for every $1 of revenue generated, Koufu only need to spend staff cost of 17cents as compared to Kimly 26cents.
Valuation
As compared to peers with similar size in terms of market capitalization and after adjusting* its balance sheet and profit and loss statement taking into account the transactions listed in Related Party Transactions section, Koufu PE ratio of 14.38c and price/NTA per share of 4.85x seems to suggest its valuation of $0.63 per share is cheaper than Kimly and much cheaper as compared to Jumbo. If it were to trade at the same valuation as Kimly, its share price will be $0.815 based on Kimly PE ratio and $0.685 based on Kimly Price/NTA per share. A potential appreciation of 29% and 8.7% respectively above its offering price of $0.63.
Koufu has suggested a dividend payout of at least 50% of net profits after tax generated in FY2018 and FY2019, this translate to an annual dividend of 3.4% based on the above adjusted profit after tax.
Conclusion
Koufu seems to be rightly priced and looks attractive to invest in a cash generative business.
Its future growth and risk depends on:
My take on this IPO is neutral. For interested investor, you still have 2 days to ponder on!
Its future growth and risk depends on:
- The future central kitchen in improving their margins and generating alternative source of revenue from its spare capacity
- Success of local and overseas expansion
My take on this IPO is neutral. For interested investor, you still have 2 days to ponder on!
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