IPO Analysis: Koufu Group Ltd

Koufu Logo.png

Singapore food court operator Koufu Group Ltd has filed for a IPO on the SGX Main board. Summary of listing details as follows:

Offer price: $0.63
Total shares offered: 97,008,000
Placement shares: 90,675,000
Public shares: 6,333,000
Closing date for application: 16 July 2018 12pm
Commencement of trading: 18 July 2018

Full prospectus can be found here.

Here’s my thoughts on the salient points of this listing.

1. Company Profile and Business Model

Koufu operates 2 key divisions, Outlet and mall management, and F&B retail largely in Singapore, with 1 food court in Macau.

Business Breakdown

Koufu Brands

Outlet and mall management

The outlet and mall management business relates to management of the operational aspects of the food courts and coffee shops – ensuring the premises are clean, finding stall operators, account management and billing, etc. They also operate a hawker centre in Jurong West (on a social enterprise model) and Punggol Plaza.

Interestingly, the prospectus also shines some light their sales cycle. Stall operators are generally charged the higher of a fixed monthly fee or a variable monthly fee pegged to stall sales. All sales are processed through the company provided POS system and cash are collected and retained daily by Koufu. Statements of account are issued twice monthly and sales proceeds net of monthly fees and other charges are paid to stall operators within 7 days.

This means that they have a low likelihood of bad debts as revenue is collected upfront. In fact, the time lag between collection of revenue and payout of sales to stall operators increases the interest income of the company, similar to insurance companies or payroll processors.

F&B Retail

F&B Retail consists of 4 concepts: F&B stalls, F&B kiosks, Quick Service Restaurants and Full Service Restaurants. F&B stalls make up the bulk of F&B retail revenue. These stalls are mostly drink stalls in their food courts, with some other stalls like Chicken Rice and Western food stalls.

2. Financials

Revenue and Profit

Revenue and profit figures have been growing over the past 3 years, but at a declining rate, which is concerning.

EPS.JPG

At adjusted EPS of 4.83 cents and 63 cents offering price, it represents a 13x trailing PE, which I think is fair but not necessarily exciting. Assuming a 50% dividend payout ratio guided by management, it represents a 2.415 cent dividend or 3.83% trailing yield.

3. Use of Proceeds

Use of proceeds

Total proceeds comes up to approximately 70.5 million, of which the bulk of the 45.5 million proceeds will be used for the integrated facility to serve as its HQ and expanded central kitchen to support its expansion plans in Singapore and achieve greater productivity gains. The remainder will go straight into the founders’ pockets as they are offering their own shares as part of the IPO.

4. Shareholders

The shareholding structure immediately post the IPO, assuming no over allotment, is as follows:

  • Jun Yuan Holdings – 78.7% (Founders’ investment company)
  • Cornerstone Shareholders – 3.8%
    • Cornerstone Shareholders are 2 Singapore family investment vehicles, One Hill Investments and Qilin Asset Management, and Maxi-Harvest Group. Maxi-Harvest Group is owned by Lee Sai Sing, a non-independent director of Koufu’s founder’s brother’s Catalist listed company GS Holdings Ltd. In summary, nothing much to shout about and at 3.8% holdings, hard to say they are really cornerstone.
  • Public Shareholders – 17.5%

Cornerstone shareholders are not subject to lock-ups, the founders are subject to a standard 6 month lock-up. Post IPO the founders still retain significant control over the company.

5. Peer Valuation

The closest listed peer to Koufu is Kimly Limited, a listed chain of coffee shops which IPO-ed in 2016. Kimly Limited currently trades at approximately 18.65 times P/E and 5.19 P/B. Between the 2, Koufu is priced more attractively at 13 times P/E and 4.9 P/B.

Looking back at the way Kimly performed since IPO, it priced at about 12 times P/E, enjoyed a ridiculous first day pop of over 100%, before spending the next 2 years dropping to its current valuation. Given the intense interest on day 1 for Kimly, it may be an indication for Singaporeans’ interest in a food court business like Koufu.

My Thoughts

Positives

  • Defensive and largely recession proof business
  • Highly positive operational cash flow
  • Experienced management and founders
  • Fair valuation
  • Dividend paying
  • Proceeds used to improve productivity of the business
  • Potential strong demand as seen in Kimly IPO

Negatives

  • Highly competitive business in a highly fragmented market
  • Management has no proven overseas expansion track record
  • Founders are cashing out
  • Weak cornerstone shareholders
  • IPO-ing in a weak environment given the trade war fears among other factors

In spite of the negatives, I have applied for a small position for speculation purposes. If I am allotted some shares, my initial thoughts is to sell any insane 1st week pop. If no pop happens, hunker down for sometime and observe the company’s performance. Of course, if I get nothing, I also don’t mind.

My first time applying for IPO shares so we’ll see how things go. Applications close tomorrow at 12pm.

Happy Hunting,
KK

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