Investment Highlights

• We maintain our BUY call on Berjaya Food (BFood) with an unchanged FV of RM2.01/share. 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 revival. The group’s expected earnings growth of 73% for FY19F is attractive coupled with the stellar Starbucks brand.

• 1HFY19 net profit was broadly in line, accounting for 56% and 52% of our and street’s full-year estimates respectively. Net profit grew 19% YoY to RM13.3mil due to Starbuck’s robust performance and the cessation of the consolidation of KRR Indo’s loss-making operations.

• Key highlights of BFood’s 2QFY18 results include:
  1. 1HFY19 topline grew 4.1% on the back of an additional 21 Starbucks stores, bringing the total number of outlets to 269 (vs. 248 in 1HFY18). However, it was offset by a decline in the number of Kenny Rogers Roasters (KRR) division from 81 stores in 2QFY18 to 75 stores. We believe the group is still in the midst of weeding out loss-making outlets to ensure focused efforts are made in outlets with better profitability profile.
  2. Starbucks SSSG improved 2.7%. We believe this is due to the tax holiday period which coincided with 1HFY19, resulting in an improved consumer spending. However, the positive impact was slightly offset by an 8.5% decline in SSSG under its KRR division coupled with a 21% decline in its Jollibean’s revenue.
  3. Excluding KRR Indo’s portion in 1HFY18, 1HFY19 EBIT rose circa 9%. We believe this is due to lower raw material costs which raised EBIT margins by 0.4ppt to 9.1%.

• Currently, BFood has opened 4 new stores, bringing the total number of store additions in FY19 to 13. This is in line with the group’s plan to open 25-30 new stores in FY19F. We expect SSSG to remain muted at 2-3% in FY19F as the introduction of the SST may affect consumer spending.

• BFood has started to offer its Jollibean brand for franchising. Although minimal, we believe the contribution from Jollibean’s franchising will further elevate BFood’s earnings growth potential.

• Moving forward, we expect input costs to remain favourable in light of cheaper coffee prices which dropped 18% to US$127/bag in 1HFY19 from US$155/bag in 1HFY18 (as shown in Exhibit 2) although offset by a 10% import tax as well as a higher cost stemming from the substitution of its plastic straws with those made with a biodegradable material.

Source: AmInvest Research - 6 Dec 2018