Investment Highlights

• We maintain our BUY call on Berjaya Food (BFood) with an unchanged FV of RM2.01/share, pegged to a P/E of 25x. Valuations are pegged to a P/E of 25x, reflecting a 20% premium to its historical valuations. We think that this is justified as BFood is on the cusp of a revival. The group’s earnings growth of 53.8% for FY19F is attractive and it has a stellar Starbucks brand.

• BFood reported a 1QFY19 core net profit of RM6.2mil (+17% YoY). This was in line with ours and streets earnings estimates, accounting for 26% and 24% of full year’s earnings respectively.

• The gross dividend of 1.0sen/share was in line with our expectations.

• Key highlights of BFood’s results include: i) BFood’s EBIT grew by 10.8% YoY to RM15mil in 1QFY19. This was in tandem with the higher revenue of RM161mil (YoY: 5%; QoQ: 1%). ii) BFood’s Starbucks segment raked in EBIT of RM17m (YoY: 16%; QoQ: 12%) on the back of higher revenue from Starbucks (YoY: 10.4%; QoQ: 1.9%). Starbucks’ revenue growth was underpinned by a higher store count, a resilient SSSG and improved consumer sentiment resulting from the tax holiday period from June to August 2018. There were three additional stores in 1QFY19 bringing the total number of Starbucks stores to 263. Starbuck’s SSSG was 2.7% (4QFY18: 1.8%) in 1QFY19. iii) Due to the closure of three non-performing stores, KRR’s loss before tax narrowed to RM1.7m in 1QFY19 from RM4.2m in 4QFY18. The number of KKR stores was 78 in 1QFY19 vs. 81 in 4QFY18. KKR recorded a 4% contraction in SSSG (4QFY18: -3%) in 1QFY19.

• Outlook on BFood:- i) BFood has only opened three new Starbucks stores in 1QFY19 vs. the target of 25-30 new stores for the full year. We expect most of the stores to open in 2QFY19 leading to the peak of Starbucks’ sales in 3QFY19. We estimate SSSG to be muted at 2-3% in FY19F as the introduction of the Sales and Service Tax in September 2018 may affect consumer spending. ii) Management is optimistic in its ability to turnaround KRR’s operations in FY19F. In spite of this, we think that KRR will still continue to affect BFood’s earnings albeit at a smaller magnitude. We estimate KKR’s losses to decline to RM2mil in FY19F from RM7mil in FY18.

Source: AmInvest Research - 19 Sept 2018