Fair value for a dividend machine: how Kimly combines 5.1% yield and defensive cash generation with an early-stage property pivot, and why that matters in an economic slowdown.
This is a fair and well-constructed critique. Thank you! The 11.5% FCF yield was calculated on reported OCF minus capex, without adjusting for IFRS 16 lease treatment. That's the limitation you've correctly identified.
The accounting mechanics are worth stating clearly. When Kimly signs a new lease, the ROU asset and lease liability are recognised simultaneously, no cash changes hands at inception, so nothing appears as a cash outflow on the statement. But the obligation is real. Over the lease term, the cash cost splits between interest (operating outflow, which hits OCF) and principal repayment (financing outflow, which doesn't). This means reported OCF is higher than it would have been under pre-IFRS 16 treatment, where all rent would have sat in operating expenses.
The cleaner measure for a lease-heavy operator is FCF after lease principal repayments. With S$142.8M of lease liabilities and average tenors roughly in the 3-year range, annual principal repayments are in the S$40-50M range. Deducting that from S$56M of reported FCF gets to a true FCF in the low-to-mid single digits of millions, consistent with your ~2% yield estimate.
This is a genuine flaw in how the valuation was presented, and we should have flagged it. The investment case doesn't entirely collapse, the 5.1% dividend is real cash and well-covered by the economic cash flows of the business, but presenting 11.5% FCF yield without the IFRS 16 adjustment was misleading, even if unintentionally so. We have added a note to the piece.
Because a lease is essentially two transactions wrapped in one, I would include the additions to ROU to investing outflow and include the additions to lease liability as a financing inflow.
Another advantage is that it becomes clear to me that capex in 2025 exceeded operating cash flow.
The financing inflow from lease liability (essentially loans from landlords) covered the deficit and the dividends.
In any case, both our methods would reach the same conclusion: FCF is not as high as it first appears.
Some time ago, I was also interested in Kimly Limited (1D0; KMLY SP).
But I passed after this news: "Ex-chairman, director of coffee shop chain Kimly fined for not disclosing stake in acquisition of company" [1]
DPP Suhas Malhotra said the case involves "an intentional and blatant refusal to comply with the disclosure obligations which apply to all publicly listed companies in Singapore".
On Lim's conduct, Mr Malhotra said this was "an unabashed choice by Lim to not disclose his interest in ASC, in contravention of the law".
"That the executive chairman of a public company can treat his company's obligations in such a cavalier manner is troubling, to say the least," he said.
Fair point, and one we should have addressed in the piece.
The facts: Lim Hee Liat was convicted in February 2022 for failing to disclose his 30% stake in ASC when Kimly acquired it for S$16M. Fined S$150,000, disqualified as director for five years. His co-director received the same treatment. The conduct was described by the prosecution as "intentional and blatant". Serious language.
What's changed: Lim is off the board. Kimly now has an independent chairman. The ASC deal itself was unwound after Pokka terminated its supply agreement, so no financial benefit was realised.
What hasn't changed: Lim still controls ~40% of shares as the founding shareholder. No fiduciary role, but real influence.
Your decision to pass is entirely reasonable. We hold the position with that governance risk priced in. Reasonable people can disagree on whether the current discount is sufficient.
(2) The reported 11.5% FCF yield overstates Kimly’s true cash generation.
11.5% is calculated from SGD 55 mn of FCF.
But additions to right-of-use (ROU) assets have not been deducted from SGD 55 mn.
For a lease-heavy operator like Kimly, those ROU additions are capex and should be deducted from operating cash flow when estimating FCF.
Additions to ROU represent the cost of acquiring operating rights over coffee shop sites.
However, the cash flow statement fails to show them as capex because it is immediately offset by financing inflow from lease liabilities.
"A lease is an investing transaction, where a company buys a fixed asset, and a financing transaction, where the company raises debt.”
Once the adjustment is made, true FCF yield likely falls to ~2% in FY2025.
This is a fair and well-constructed critique. Thank you! The 11.5% FCF yield was calculated on reported OCF minus capex, without adjusting for IFRS 16 lease treatment. That's the limitation you've correctly identified.
The accounting mechanics are worth stating clearly. When Kimly signs a new lease, the ROU asset and lease liability are recognised simultaneously, no cash changes hands at inception, so nothing appears as a cash outflow on the statement. But the obligation is real. Over the lease term, the cash cost splits between interest (operating outflow, which hits OCF) and principal repayment (financing outflow, which doesn't). This means reported OCF is higher than it would have been under pre-IFRS 16 treatment, where all rent would have sat in operating expenses.
The cleaner measure for a lease-heavy operator is FCF after lease principal repayments. With S$142.8M of lease liabilities and average tenors roughly in the 3-year range, annual principal repayments are in the S$40-50M range. Deducting that from S$56M of reported FCF gets to a true FCF in the low-to-mid single digits of millions, consistent with your ~2% yield estimate.
This is a genuine flaw in how the valuation was presented, and we should have flagged it. The investment case doesn't entirely collapse, the 5.1% dividend is real cash and well-covered by the economic cash flows of the business, but presenting 11.5% FCF yield without the IFRS 16 adjustment was misleading, even if unintentionally so. We have added a note to the piece.
Thanks for your reply.
Because a lease is essentially two transactions wrapped in one, I would include the additions to ROU to investing outflow and include the additions to lease liability as a financing inflow.
Another advantage is that it becomes clear to me that capex in 2025 exceeded operating cash flow.
The financing inflow from lease liability (essentially loans from landlords) covered the deficit and the dividends.
In any case, both our methods would reach the same conclusion: FCF is not as high as it first appears.
The SEA Analyst,
(1) What is your assessment of management?
Some time ago, I was also interested in Kimly Limited (1D0; KMLY SP).
But I passed after this news: "Ex-chairman, director of coffee shop chain Kimly fined for not disclosing stake in acquisition of company" [1]
DPP Suhas Malhotra said the case involves "an intentional and blatant refusal to comply with the disclosure obligations which apply to all publicly listed companies in Singapore".
On Lim's conduct, Mr Malhotra said this was "an unabashed choice by Lim to not disclose his interest in ASC, in contravention of the law".
"That the executive chairman of a public company can treat his company's obligations in such a cavalier manner is troubling, to say the least," he said.
[1] https://www.channelnewsasia.com/singapore/kimly-ex-chairman-director-fined-not-disclosing-stake-coffee-shop-chain-2501866
Fair point, and one we should have addressed in the piece.
The facts: Lim Hee Liat was convicted in February 2022 for failing to disclose his 30% stake in ASC when Kimly acquired it for S$16M. Fined S$150,000, disqualified as director for five years. His co-director received the same treatment. The conduct was described by the prosecution as "intentional and blatant". Serious language.
What's changed: Lim is off the board. Kimly now has an independent chairman. The ASC deal itself was unwound after Pokka terminated its supply agreement, so no financial benefit was realised.
What hasn't changed: Lim still controls ~40% of shares as the founding shareholder. No fiduciary role, but real influence.
Your decision to pass is entirely reasonable. We hold the position with that governance risk priced in. Reasonable people can disagree on whether the current discount is sufficient.
Thanks for discussing the mitigating factors!