• NEUTRAL on Singapore downstream F&B food service players; Top Pick: Kimly (KMLY). We make no change to our NEUTRAL weighting for the Singapore downstream F&B food services sector. We have a BUY call for KMLY and a NEUTRAL rating for Japan Foods (JFOOD). KMLY remains our sector Top Pick, with its valuation at close to -1SD from the P/E mean and growth led by its outlet network expansion. We remain cautious on JFOOD, amid anticipated operating margin pressure vs a slightly stretched valuation.

• Singapore Department of Statistics’ (SingStat) Food & Beverage Services Index has done well in recent months. Overall retail sales for F&B food services YTD and throughout the Lunar New Year period has continued to improve YoY, based on SingStat’s Singapore retail sales data for F&B food services. January’s F&B food services index declined 6.3pts YoY to 107.6pts (2017: 100pts), while February’s sales surged 14.8pts to 115.2pts over the same period. Accounting for the difference in timing of both years’ Lunar New Years, both January and February’s F&B food services index collectively increased 8.5pts on the index, over the last year. The buoyant consumption momentum following consecutive months of YoY improvement bodes well for F&B food service retailers.

• Halal segment still in expansion mode. Both JFOOD and KMLY continue to concentrate on the halal segment. 48% of JFOOD’s outlets (ie 38 out of its 78 restaurants) are halal eateries. In 3Q24, six of its nine new restaurants opened were halal-concept restaurants. JFOOD’s halal brands include Yakiniku Shokudo (halal barbecue) and Tokyo Shokudo (halal ramen, tendon, and tsukemen). KMLY is also concentrating on expanding its halal Tenderfresh brands and Kedai Kopi outlets, especially with Tenderfresh delivering an encouraging performance.

• Go defensive, coffeeshops over quick-service restaurant (QSR) formats preferred. KMLY remains as our stock pick for the sector over JFOOD as we believe the coffeeshop format being more of a staple will offer more defensive qualities over discretionary quick service restaurant formats. Consumption at coffee shops should remain buoyant this year, as it normally accepts Community Development Council (CDC) vouchers given to every Singaporean household in the latest GST support measures. This should benefit KMLY due to its concentration of coffeeshop outlets. Its valuation is also more compelling at 10x forward P/E, offering a 6% dividend yield.

• NEUTRAL on JFOOD. We expect FY24 earnings to decline, on operating margin pressure. Operating costs should remain elevated as a result of manpower constraints, higher-than-normal capex, and elevated depreciation expenses from new stores in the near term. Nonetheless, revenue growth should be driven by its network expansion especially its halal-concept restaurants. The stock is trading at a lofty c.24x FY24F P/E – we will wait for this to return to more reasonable levels, and for its GPM to recover before we turn more more positive on the counter.

• BUY KMLY. We like KMLY for its cash-generative ability, strong net cash balance sheet, and c.6% dividend payout. Growth should be driven by the opening of new outlets, especially in the halal segment. The robust pipeline of Housing & Development Board’s eight new eating houses available for tender in 2024 offers opportunity for KMLY to expand its network of outlets, including the halal market sub-segment for its Kedai Kopi coffee shop and Tenderfresh brands. We have factored in higher manpower cost pressures, offset by staff rationalisation initiatives.

Source: RHB Securities Research - 25 Apr 2024