Investment Highlights

• We maintain our BUY call on Berjaya Food (BFood) with a slightly higher FV of RM2.03/share (vs. RM2.01 previously) after rolling forward the valuation from CY19F to CY20F.

• We also tweaked our earnings projections for FY19F, FY20F and FY21F by 6.2%, 5.0% and 2.3% respectively to reflect a higher SSSG growth. 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 better times. The group’s expected earnings growth of 86% for FY19F is attractive coupled with the stellar Starbucks brand.

• We came away from a recent meeting with BFood feeling positive. The key highlights are:

1. Starbucks is still on expansion mode with a promising growth outlook.

2. Kenny Roger’s Roaster operations are anticipated to break even by end-FY19 with expectations of positive SSSG growth.

3. Jollibean’s brand is being offered up for franchising with deals already in motion in India and the Philippines.

• Starbucks is still on expansion mode with plans of opening around 30 stores per year for FY19 and FY20. Presently, Starbucks store count adds up to 282 stores (vs. 262 stores in April 2018) of which 232 are core stores, 42 drive-through stores and 8 reserve stores (BFood is opening its 8th Starbucks reserve store today in Berjaya Times Square).
• Promisingly, footfall has also been on the rise, reflected by a 4% YoY increase in number of daily transaction now at an average of 260 transactions per day while merchandise sales have also been increasing.
• Its collaboration with Petronas is also on track with 15 out of the planned 50 kiosks now open. These mini kiosks are an extension of Starbucks’ core stores and is a minor but positive contributor towards BFood’s SSSG.
• Although BFood benefits from a stronger MYR against the USD (45–50% of Starbucks’ raw materials are sourced from the US), it will largely be offset by the 5% import tax under the SST which will be recognized as part of sales cost. Based on our sensitivity analysis, every 1% rise of the MYR against the USD improves Starbucks earnings by 2%.

• Factoring in all these inputs, we opine that Starbucks’ SSSG s will grow at an estimate of 5% YoY SSSG growth in FY19F whereas its gross margins will remain at similar levels of circa 48%.

• Kenny Rogers Roasters’ now has 78 stores inclusive of 2 KRR Express stores with plans to open up 4 more KRR Express stores in FY19. KRR’s SSSG is expected to continue to expand as their footfalls continue to rise. This was partly contributed by the opening of KRR Express stores which were a success in gaining traction with the customers. Management expects KRR’s EBIT to reach near breakeven point by end-FY19. We opine that KRR’s loss before interest and tax will be narrowed to RM1.9mil (vs. a loss before interest and tax of RM7.9mil in FY18) before breaking even in FY20.

• Jollibean Singapore has recently been offered up for franchising. Although minimal, we believe the franchising fee as well as the royalty fees will improve Jollibean’s profitability which will assist to improve BFood’s bottom line. Jollibean Singapore will enjoy a US$5,000 upfront franchise fee per store with a 4% royalty fee on the franchisee’s revenue which we believe will start streaming in as early as FY20. BFood has also expanded its FMCG’s product range to include Jollibean’s bottled soy drinks. However we believe earnings impact from this segment will be marginal as FMCG only makes up around 0.5% of total EBITDA.

Source: AmInvest Research - 31 Jan 2019