• D/G to NEUTRAL from Buy, unchanged MYR0.77 TP offers 5% upside with c.4% FY24F (Jun) yield. We continue to like Berjaya Food due to Starbucks’ strong brand equity and unmatched market positioning. That said, we believe its current valuation is fair, reflecting the company's fundamentals and growth prospects. We opt not to stretch our valuation further, considering the negative earnings growth ahead, ie normalising from the high base of FY23. We also take into account the cautious consumer sentiment on the back of heightened inflationary pressures.

• Expansion – BFD’s key earnings driver. BFD plans to ramp up its expansion to drive growth, and target to open 40-50 new Starbucks outlets in FY24 (FY23: 37 net new store openings), despite the environment of high operating costs. Currently, 50-60% of its stores are located in the central region of West Malaysia, and management is planning to strengthen its presence and tap onto the opportunities in rural areas (c.20 stores) as it is already well-established in the former. To cater to diverse customer needs, BFD plans to roll out a variety of store formats, encompassing standard, drive-through, reserve, and smaller-sized outlets. It is targeting an average payback period of three years.

• Margins outlook. While raw material costs are easing and stabilising, the recent strengthening of the USD could offset the expected margin recovery, given that c.60% of raw materials are denominated in USD. RHB economists forecast a continued strengthening of the USD, and this could exert pressure to BFD’s margins. That said, management is not planning to hike the ASP (last hike in end-2022), in view of the current market conditions and outlet expansion plans. Instead, it will continue to execute effective marketing initiatives and promotions to spur consumer spending. In addition, investment to upgrade digital capabilities will be another focus to drive operational efficiency.

• Going through earnings normalisation. We expect the group to post stronger earnings QoQ, driven by contributions from new stores and relatively better seasonality. However, BFD’s exceptional 1HFY23 results are not likely to be replicated – considering the subdued consumer sentiment and the rising operating cost environment. As such, we keep our earnings forecasts unchanged, and we believe our FY24F earnings growth of -12% is quite reasonable.

• Downgrade to NEUTRAL. Correspondingly, we maintain our DCF-derived TP of MYR0.77 (inclusive of a 4% ESG premium, based on an ESG score of 3.2), which implies 15x FY24F P/E or close to its 5-year mean. We think the stock is fairly valued now after a commendable share price rebound in the last three months. On the flip side, the downside should be capped by a current elevated earnings base relative to pre-pandemic levels and consistent dividend payout, backed by robust cash flow generation.

• Key upside/downside risks: Stronger/weaker-than-expected consumer sentiment and higher/lower-than-expected margins.

Source: RHB Securities Research - 6 Oct 2023