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Kimly (KMLY SP - US$297 million) is a Singapore-based operator of “coffeeshops”, a type of food court found in residential areas.
The company leases spaces from the government agency Housing & Development Board, sets up a food court and sub-lets stalls to individual operators. However, it retains some of the more lucrative food stalls, including drinks (alcohol) and snacks. That business model has worked well, with a return on equity of over 20% in the past five years.
Kimly trades at a 2024e forward P/E of about 12x, far below the global peer group. The big question is what type of multiple a company like this deserves. Does it have an economic moat, or will competitive pressures eventually push the return on equity down to the cost of capital?
While barriers to entry are low, I think leasing and sub-letting food stalls help bring in foot traffic to Kimly’s highly profitable drinks and snacks stalls. By inviting third-party food stalls to its coffee shops, the company can also offer its customers a greater variety of foods.
I also think that the execution has been decent. Kimly’s headquarters are in a nondescript building in the far north of Singapore at the same location as a central kitchen. Its margins have remained at the top of the industry for many years, suggesting strong cost control.
There’s a case to be made that greater Singapore public housing (“HDB”) construction will accelerate after the pandemic, from 2021’s level of 17,000 flats closer to the low 20,000s. I don’t think it’ll make a huge difference, except for a slight increase in organic growth.
There are a few parts of the story that aren’t exactly clean:
- Kimly’s effective tax rate was 5% before the IPO, suggesting that taxable earnings might have been lower than those reported in the financial statements.
- And while insiders did not sell any shares in the IPO, the pace of M&A has been elevated, with at least two announced related party transactions. One of those transactions involved the ListCo buying a company 30% owned by the founder.
- There are also recurring related party transactions where the ListCo rents properties from a company owned by either the founder or one of the directors.
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