Why Koufu Group (SGX: VL6) is a good buy right now
Most of you who are based in Singapore will be familiar with Koufu Group, having visited it at least once in your lifetime. You will notice that foot traffic in Koufu food courts are high and it’s synonym to a household brand. Over the weekends, when I go for breakfast with my dad, I am always in awe to see the queue at one of their outlet in Punggol Plaza always snaking all the way into the entrance.
For those of you who don’t know, Koufu Group Limited (SGX: VL6) is an investment holding company which manages and operates food courts and coffee shops in Singapore and Macau. The company was founded in 2002 with over 18 years of history and is based in Singapore.
Koufu Group mainly operates through two segments: (i) Outlet & Mall Management and (ii) F&B Retail.
The Outlet & Mall Management segment operates 46 food courts, 15 coffee shops, 1 hawker center, and 1 commercial mall in Singapore. It also has 1 food court in Macau.
The F&B Retail segment operates 69 F&B stalls, 9 F&B kiosks, 8 quick service restaurants, and 3 full-service restaurants in Singapore, as well as 2 food and beverage stalls, and 1 food and beverage kiosk in Macau. The company operates food courts under the Koufu, Rasapura Masters, Cookhouse, Fork & Spoon, and Gourmet Paradise brands while its coffee shops are under the Happy Hawkers, R&B Tea, and 1983-A Taste Of Nanyang brands.
Some of the brands that Koufu Group operates. Source: Koufu
With current price of $0.68 as of 29 June 2020, it offers an attractive entry price.
Here are a few reasons why I think it is a good buy right now.
1. Phase 2 of Singapore’s reopening will boost foot traffic back into stores.
The Singapore government announced on 15 June that most businesses and social activities will be allowed to resume. This is a significant move as compared to the previous 2 months of “circuit breaker (lockdown lol)”. Retail businesses can reopen their physical outlets, and food and beverage (F&B) dine-in will also be allowed, although there must not be more than five diners per table. This means that although Koufu’s foot traffic won’t be to the levels of pre-COVID, it will certainly increase over the coming months. This will help to boost it’s revenue in the mid-term of 2021 and based on CIMB’s research, it expects 9%-25% yoy sales growth for the next two years.
It is almost always full!
2. It is a cash generative business.
Koufu had strong operating cash flow of $30-51 million in the past three years. Their net cash position as of 31 December 2019 is $86 million. This allows them to tide through any uncertainty especially during this period. Furthermore, when compared to it’s peers like Jumbo, Kimly, Japan Foods, Jollibee etc, it is the most profitable based on highest ROE and lowest gearing. I think that this is definitely one of a rare gem to hold for the longer term.
3. Downside mitigated from government wage subsidies.
Government wage subsidies through the Jobs Support Scheme, worker levy rebates, rental rebates is likely to act as a cushion to earnings impact from COVID-19. This helps stall tenants to sustain their operations during this difficult period.
4. It is a resilient business overall.
Similar to Sheng Shiong Group and Inner Mongolia Yili Industrial Group which I wrote in an earlier post, I believe Koufu’s business is a resilient one despite the temporary setback. By operating similar to a master-tenant, Koufu charges rent and ancillary fees to its tenants. Occupancy level are healthy at more than 93% for 2019. We expect this to be >89% going forward and rent collections to be healthy as well. The margins of the stalls operating in the food courts and coffee shops are high too, giving us the comfort that we need.
As a disclaimer, I am personally invested into Koufu Group Limited as I see the long term potential of it. I believe the COVID-19 situation will only improve and lives will go back to normal once a vaccine is developed. For this particular stock, I used my CPF Investment Account to invest. I will share more in another post how you can use your CPF Investment Account to invest in individual stock to get higher returns.
Are there any other good stock recommendations which you know of? Share with us in the comments box below.