Last December, two top Kimly directors were arrested by the Commercial Affairs Department (CAD). They are currently being investigated on the company’s proposed acquisition of Asian Story Corporation (ASC) and are suspected of giving false or misleading information that is likely to induce the sale or purchase of securities, or affect the market price of securities — an offence under Section 199 of the Securities and Futures Act. Kimly has since pulled out of the proposed acquisition.
With this in mind, I decided to attend Kimly’s annual general meeting this year to learn more about the issue and the company’s business. When I reached the venue, I was surprised by the turnout because AGMs of small-cap companies are usually poorly attended. (I guess when there is bad news, people want to know more.)
Here are the five things I learned from the 2019 Kimly AGM:
1. Naturally, the first question raised by a shareholder was about the failed ASC acquisition and the CAD probe. Independent director Danny Lim said that they are unable to comment on this matter as the case is still under investigation but assured that Kimly’s business operations were unaffected. Another shareholder pressed the issue and wanted to know how the board would act if the accusations turned out to be true. Lead Independent director Ter Kim Cheu reiterated that the case is still ongoing, and the two directors are still innocent until proven guilty. If found guilty, both directors would be removed from the board and a succession plan is already been in place.
2. Kimly, a coffeeshop operator, runs a chain of nearly 70 food outlets (i.e. coffeeshops) and 130 food stalls around Singapore. Kimly itself doesn’t not own any coffeeshop properties. Instead, the company leases coffeeshop space from the HDB or private landlords as a master lessee. It then operates the drinks and cooked food stall, and sub-leases the rest of the space to other food operators.
3. Kimly’s fixed rental expense for 2017 and 2018 are S$32.9 million and S$36.8 million respectively. The company has several related-party transactions where Kimly pays rent to companies related to Kimly’s directors. These related-party transactions accounted for 24% and 22.3% of total rent in 2017 and 2018 respectively.
When a shareholder asked how the rents paid to related parties were negotiated, independent director Jeffery Wee said that the rent is charged based on market rates.
4. Kimly spent about S$300,000 on coffee shop renovations and S$1.2 million for food court renovations in 2018. Kimly’s occupancy rate is at 97% at their food outlets and 5-8 tenants lease multiple stalls from the company. Kimly targets to open 3-5 new outlets annually.
5. In July 2018, Kimly acquired Tonkichi and Rive Gauche, a Japanese restaurant and French confectionary business with 25 years of operating history. The newly-acquired business contributed revenues of $$1.86 million but made a loss of S$117,000 in 2018. The management said that the acquisition complements Kimly’s existing business and diversifies its revenue streams. Despite the net profit loss, the acquisition is actually EBITDA-profitable and allows Kimly to penetrate a new market – shopping malls. Kimly’s entry into malls increased its rental expense by 11.9% to S$36.8 million in 2018.
The fifth perspective
I was unable to shed more light on the CAD probe as the directors kept mum about the details of the investigation. Shareholders will simply have to wait for news from the authorities in due time.
One thing to note is that a significant portion of Kimly’s rental expense is paid to related parties. Related-party transactions aren’t necessarily a red flag, but it’s important to monitor them so they don’t cause a conflict of interests or negatively affect shareholder value.
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