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3 Risks Investors Should Know About Koufu Group Limited

Koufu Group Limited (SGX: VL6) went public on Wednesday (18 July). The food court operator’s shares were sold for 63 Singapore cents per piece, giving the company an initial market cap of S$349.8 million. Since Koufu is a well-known brand in Singapore, retail investors might be interested in having a stake in the company. However, before jumping in, here are some risks that investors should be aware of.

Integrated facility may not live up to hype

Of the S$43 million that the group will receive from the initial public offering (IPO), around 70% or S$30 million is going to be used to build an integrated facility. This facility is meant to house a larger kitchen, dishwashing facility and R&D centre.

However, would this hefty investment pay off for the company? After food catering company Neo Group Ltd (SGX:5UJ) went public in 2012, it built its central kitchen. It had hoped that the central kitchen would provide cost-efficiencies but as of now, it looks like the company has failed to deliver. Together with poor acquisition decisions, the company’s bottom line and consequently, share price have declined. I hope Koufu will not suffer the same fate.

Challenging retail environment

Most of the Koufu’s food courts are located in shopping malls around Singapore. Unfortunately, Singapore has faced a challenging retail environment in recent years. For instance, in the first quarter of 2018, CapitaLand Mall Trust‘s (SGX: C38U) shopper traffic declined by 2.1% year-on-year. Tenant sales, likewise, dipped 0.2%. Tenant sales in the F&B segment declined by 1%, which was faster than the average over the quarter.

If the challenging retail environment persists, Koufu might face difficulty finding tenants for its food courts or might even have to lower rental rates, which could affect profitability going forward.

Mature Singapore market and relatively little experience expanding overseas

Thirdly, Singapore’s retail scene is relatively mature with only a few new shopping malls expected in 2018 and 2019. This gives Koufu fewer opportunities to expand locally. Koufu also has limited experience and brand awareness outside of Singapore.

As of now, the company only operates one food court internationally, which is in Macau. With limited overseas experience, the company might face challenges in expanding its business abroad.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended units of CapitaLand Mall Trust. Motley Fool Singapore contributor Jeremy Chia does not own shares in any companies mentioned.