IPO Chilli Ratings

IPO Chilli Ratings
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Koufu Group Limited

Koufu Group Limited ("Koufu" or the "Group") is offering 97,008,000 shares in the IPO at $0.63 per share. 90.675m shares will be through the placement with the remaining 6.333m via the Public Offer. There is an over-allotment option. The offer will close on 16 July 2018 at 12pm and starts trading at 9am on 18 July 2018.

Principal Business
Koufu is one of the largest and most established operators and managers of food courts and coffee shops in Singapore, with a history dating back to 2002 with one coffee shop and two food courts. Fast forward to 2018, it has outlets all over Singapore.

口福 means it's one good fortune to feast on good food. The business philosophy has also been to integrate modern management discipline, retaining traditional coffee shop culture and providing patrons value for money dining options in a comfortable environment.

The Group manages 48 food courts, 1 hawker centre, 14 coffee shops, 1 commercial mall, 83 F&B stalls primarily in Singapore but has also established a small presence in Macau.

I like the way the Group uses different brands to differentiate itself. For example, the Koufu food courts are located in the heartlands or educational institutes whereas it uses a more premium brand at Marina Bay Sands or commercial malls.

Financial Highlights

The revenue for FY2017 is around $217m and the profit after tax is $26.8m. The sales and profits has grown marginally from FY2016 to FY2017. It will be interesting to see if the trajectory will improve in the new few years. The financial statements are audited by KPMG.

Based on the adjusted EPS of 4.83 cents, the historical PER is around 13x. Assuming there is no growth but profits remained the same, the dividend per share will be Singapore 2.415 cents. This imply the yield is around 3.83%.

If you look at the pro-forma cashflow statements, you will notice that in 2017, the owners sold the assets and financial assets worth $75.63m and then distributed $97.3m of dividends to themselves. This is consistent with the Kimly IPO, where they pursued an "asset light" strategy and continue owning the coffee shops.

Use of proceeds

The Group intends to use the proceeds for capital expenditure on its proposed integrated facility, refurbish and renovate new and existing F&B Outlets as well as expand its business. 

What I like about Koufu
  • Resilient business and cash flow generative - The business is highly cash flow generative and the value proposition provided by Koufu ensures its business will be resilient through economic cycles as evidenced by the Group surviving SARS and the GFC since its inception. People will eat in food courts in good times and bad, hence it is rather "recession-proof".
  • Ability to attract and retain quality stall operators - The Group was able to attract quality operators and 29 of them have been with the Group for at least 5 years and they operate more than 130 F&B stalls across its network. The good relationship is critical for the Group to expand locally and overseas
  • Experienced management team with proven track record - The husband and wife team have proven themselves over the years to be able to navigate the F&B industry. it is also good to see that they are not paying themselves rich salaries post the IPO. They have taken a drastic pay cut but this would be "offset" by Incentive Bonus and dividends. 
  • Dividend paying mindset - The Group intends to recommend and distribute at least 50% of its net profits after tax generated in FY2018 and FY2019
  • Integrated facility to drive productivity and costs - The establishment of an integrated facility will help drive the next phase of growth, enhance productivity and operational efficiency, as well as increase profitability through central procurement, preparation and distribution of food products

Some of my concerns
  • Saturated and competitive local market - The revenue and profitability has been growing at a slower rate over the last 2 years. The Singapore market is probably quite saturated and highly competitive but it is good to see that the Group will continue to expand if suitable locations are found. Post IPO, the Group will open a food court in Sengkang Hospital and has plans to open two new Koufu food courts. The competitors are Food Junction, Food Republic, NTUC Foodfare in food courts, Broadway, Chang Cheng, Kim San Leng, Kimly, S-11 and Kopitiam in coffee shops. 
  • Overseas expansion unproven yet - While i am heartened to see that the Group has successfully gained a small foothold in Macau, the overseas expansion by local SMEs have never been smooth sailing. The Group wants to expand to PRC, Malaysia, Indonesia and Australia. Having said that, having a strong base in Singapore will allow it to experiment and grow overseas and they have successful done that in Macau. 
  • Dilution in pro forma NAV per share to new investors - The pro forma NAV is about 13 cents versus the IPO price of 63 cents. New investors will have a 79% dilution in pro forma NAV at listing. The price to book is around 4.9x
  • Owners are cashing out pre and post IPO - Looking at how the investment properties and other investments have declined over the last 3 years, the owners have been "reducing its investment properties" from its balance sheet from 2015 to 2017 and paying dividends to themselves. See page 84 and 85 of the prospectus. The justification is "the group does not intend to hold long-term lease hold interests of more than 30 years due to significant capital outlay arising from such long-term leaseholder properties. Seriously - cannot be more truthful than that ?! The real reason is to transfer the assets to themselves and pursue an "asset light strategy" similar to Kimly Holdings. They are also selling 45.845m vendor shares at this IPO with an over-allotment option 
  • Lack of strong cornerstone investors and weak market sentiments - The 3 cornerstone investors are primary family offices and hedge fund and collectively, will subscribe to 21m shares and own 3.8% of the Group. They are, however, not subjected to any lock-up. The weak local market sentiments are probably not helping as well. 
Peer Comparison

Koufu is actually a "pure-play" food court operators. The last listed food court operator, Food Junction, was privatised a few years back by Auric Pacific.

In terms of closest listed peers that operates food courts and/or coffee shops, it will be a mixture of Kimly and Breadtalk, which i have listed above. They are trading at rich valuations with an average of 36x PE and 4.6x Price to Book. My write up on Kimly is here.

Assuming Koufu trades at a more conservative 14-15x PE, the implied fair value will be 67 to 73 cents.

My chilli ratings
I like the "recession-proof" and cash flow generative food court business and it allow for economies of scale through a central kitchens. If the IPO was launched during good sentiments, I would have given it a 2 or 3 chilli rating but current market sentiments is weak due to the "trade war" and the prolonged market corrections. The World Cup is also drawing the gamblers away from the stock market. Hopefully with the end of World Cup this weekend, life will get back to normal.

I will give it a 1 chilli rating for the debut and a 1.5 chilli rating for the longer term due to its relatively “cheaper” valuation and dividend paying nature. Do note that I am vested.

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