June 4, 2021

Awaiting the feast

■We expect Koufu’s revenue to return to pre-Covid after FY22F with gradual border reopening and structural shift towards hybrid home/office work model.

■The commencement of integrated facility is also delayed to 3Q21F (from 2Q21F) due to the recent tightened measures. Margin expansion postponed.

■The worst could be over, but recovery takes time. Downgrade to Hold and TP lowered to S$0.71, now based on 17x FY22F P/Eat c.20% discount to peers.

Structural near-term headwinds faced

Footfall at Koufu’s outlets in Singapore has been negatively impacted by the implementation of Phase 2 (heightened alert) on 16 May 2021, whereby dining-in is prohibited at all F&B outlets across the island. As announced by Prime Minister Lee on 31 May2021, measures are likely to ease going forward, but it is highly unlikely for distancing measures to return to what they were in 1Q21(up to 8 pax allowed for gatherings)so soon, in our view. We expect 1H21F revenue to rise5% yoy(-19% vs 1H19)with weaker 2Q21F,as a significant proportion of Koufu’s current outlets are located in malls (c.43%), with a smaller proportion located in schools (c.9%) and offices(c.4%). See Fig 5 for our estimates. As Singapore shifts towards a hybrid work-from-home model, we expect footfall recovery at these locations to remain an overhang for FY21F/22F earnings.

Trim EPS estimates by 4-12% for FY21-23F

In addition to slower-than-expected footfall recovery, border reopening also remains a near-term uncertainty. Tourist arrivals in Singapore and Macau, while gradually improving, still remain weak at 2% and 23%of pre-Covid levels respectively. Commencement of the new Integrated Facility has also been delayed to 3Q21F (vs.2Q21F as previously guided) due to disruptions arising from the pandemic, postponing potential GPM expansion. That said, we think that the impact should be slightly offset by growing contribution from Deli Asia as well as enhanced grants offered from the Job Support Scheme (JSS). As such, we cut our FY21F-23F EPS estimates by 4-12%.

Downgrade to Hold while awaiting recovery; TP lowered to S$0.71

We still like Koufu for its strong balance sheet(end-FY20 net cash position of c.S$62m), giving it sufficient dry powder for working capital requirements as well as potential M&A opportunities as the economy recovers. The worst is possibly over, but recovery is expected to be gradual, in our view. Hence, we downgrade Koufu from Add to Hold. We lower our TP to S$0.71, pegged to c.17x FY22F P/E based on a c.20% discount to peers in view of the group’s smaller market cap(vs 19x FY22F P/E previously). Upside risks include faster improvement in F&B footfall and increased tourist arrival numbers. Downside risks include a resurgence in Covid-19 infections.

Awaiting the feast

Recovery to be dampened by ban on dining-in

Since Dec 20,the Singapore F&B sector has gradually recovered on the back of resumption of dine-in activities as well as easing distancing measures. As shown from Singapore F&B retail statistics, F&B outlets have seen a gradual improvement in the first quarter of 2021, with the F&B services index rising 8% yoy at end-Mar 21ledlargely by restaurants (+18% yoy), as well as cafes, food courts and other eating places (+6% yoy).

However, we expect recovery to be weighed down over the near term upon the reinstatement of Phase 2 (Heightened Alert) in Singapore from 16 May 2021 to 13 June 2021, whereby dining-in at all F&B outlets across the island is prohibited. As dine-in sales constitute a significant portion of revenue for Koufu, the new measures would negatively impact the group’s 2Q21F earnings.

On 31 May 2021, Prime Minister Lee announced the possibility of easing restrictions after 13 June should the Covid-19 situation continue to improve. While this is a positive, a return to Phase 3 measures (as seen in 1Q21) is highly unlikely, in our view.

Tourist count still weak, albeit gradually improving

Tourist arrivals in Singapore still remained weak due to strict border measures enforced. As of Apr21, the number of visitor arrivals in Singapore stood at c.26k (-5% mom).Compared to Singapore, tourist arrivals in Macau saw an uptick upon the slight easing of border controls on Mar 21. As announced by the Macau Government, foreigners will be allowed to enter Macau from China provided that they have not travelled outside China and Macau 21 days prior to their intended arrival date. This has resulted in an increase in tourist count in April2021, with tourist arrivals for the month coming in at c.795k (+5% mom).

We continue to closely monitor tourist arrivals in both countries for signs of recovery in Koufu’s tourist-oriented outlets and kiosks.

Impact of Phase 2(heightened alert) on 2Q21F

Upon the reinstatement of Phase 2on 16 May 2021, outlets located near offices, tourist hotspots, and tertiary institutions have been adversely affected by the drastically lower footfall. In view of this, Koufu has temporarily suspended operations of its food court and quick-service restaurant located at Singapore Management University, as well as two of its R&B Tea outlets (located at Far East Square and Change Alley Mall). According to management, it is possible that more outlets would be suspended to reduce operating costs incurred. Koufu has also closed two other R&B Tea outlets (located at Kinex and Singapore Management University) which were loss-making.

Based on our research, c.43% of Koufu’s self-operated outlets are located at commercial malls(e.g. Jem, Waterway Point), c.9% at educational institutions, and c.4% at offices. In view of lowered footfall at such locations, we project 2Q21F revenue to fall by c.28% as compared to 2Q19. This is still an improvement when compared to 2Q20, which recorded a -40%decrease in same-store revenuevs.1Q19. Accordingly, we expect 1H21F revenue to record +5% yoy growth.

Expansion slightly hampered

Despite headwinds faced due to the pandemic, Koufu has still continued extending its outreach across the island via the opening of one new food court (located at Sun Plaza), two new R&B Tea outlets (located at Fusionopolis and Sun Plaza), and three new Dough Culture outlets (located at Singpost Centre, Sun Plaza, and Oasis Terrace). Going forward, the group has already secured three new food court locations (located at Marina Square, NTU, and Outram Community Hospital) to be opened in 2Q21F and 3Q21F, and one new Grove outlet location (located at Northshore Plaza) to be opened in 4Q21F. The group will also be opening a coffee shop within its Integrated Facility in 3Q21F, upon the commencement of its operations.

Integrated Facility delayed; to bear fruit in FY22F

Koufu has obtained the temporary occupation permit (TOP) for its Integrated Facility in April 2021 but the commencement of operations has been delayed to 3Q21F (from 2Q21F). As announced in its 1Q21 business update, the group will be occupying 75% of total gross floor area (GFA) and tenant out the remaining 25%. Of the 75% GFA occupied by Koufu, the group will be operating a coffee shop, a cloud kitchen, and a staff dormitory.

Completion of the integrated facility is guided to bring about economies of scale to the group, as the group enjoys better control and flexibility in the production of its F&B retail products. This is expected to benefit the group’s gross profit margins from FY22F onwards. We have also forecasted rental income to commence contribution in FY22F/23F.

Earnings revision

We lower our estimates in view of slower-than-expected footfall recovery. Further concerns also include the spread of mutated variants of the virus in the region. That said, we note that Koufu has ramped up its food delivery presence since 2Q20, which should partially offset the decline in dine-in sales. 2Q21F revenue should also be aided by takeaway sales from Dough Culture and R&B Tea outlets, as these stalls mostly offer takeaway food and beverages. Enhanced support from the Jobs Support Scheme should also further dampen the impact.

As such, we lower ourFY21F/22F revenue forecasts by 4.8%/4.4% on the back of lower footfall and variable rental realised. Our PBT margin forecasts for FY21F/22F/23F are lowered to 9.7%/12.5%/14.3% (vs 10.5%/13.6%/14.4% previously). Accordingly, our FY21-23F net profit falls by 12.3%/12.0%/4.4% to S$16.4m/S$23.8m/S$28.3m.

Downgrade to Hold while awaiting recovery

In light of near-term headwinds, we downgrade Koufu from Add to Hold as we wait for further signs of recovery in footfall. We view the group’s strong balance sheet (net cash position of c.S$62m as of end-FY20) positively, which should allow it to stomach volatile times and accords it dry powder for potential M&A opportunities as the economy recovers.

Peers currently trade at c.21x FY22F P/E. We think it fair that Koufu trades at 17x FY22F P/E, a c.20% discount to peers in view of the group’s smaller market cap. This lowers our TP from S$0.94 to S$0.71.Upside risks include faster improvement in F&B footfall and heightened tourist arrival numbers. Downside risks include a resurgence in Covid-19 infections and further tightening safety measures.

HOLD by CGS-CIMB Research. Share price closed at $0.655.