Investment Highlights

• We maintain our BUY call on Berjaya Food (BFood) with a slightly higher FV of RM2.05/share (RM2.03/share). We have increased our earnings forecast slightly for FY19F, FY20F and FY21F by 3.6%, 0.8% and 0.7% respectively to account for a lower effective tax rate.

• Our valuation is pegged to a P/E of 25x CY20F which is 2SDs above its historical 1-year forward P/E. We think that this is justified as BFood is on the cusp of better times. The group’s expected earnings growth of 59% for FY19F is attractive coupled with the stellar Starbucks brand.

• 9MFY19 net profit exceeded expectations, accounting for 88.8% and 85.3% of our and street’s full-year estimates respectively.

• 9MFY19 core net profit surged 41.9% YoY to RM22.3mil due to Starbuck’s 4.5% YoY improvement in SSSG, higher store count of 282 and cessation of the consolidation of KRR Indo’s loss-making operations.

• Key highlights of BFood’s 3QFY19 results include: 1. BFood’s 3QFY19 strong performance was attributed to year-end festive promotions, school holidays and the Christmas season which boosted both beverages and merchandise sales. 3QFY19 revenue grew 8.4% QoQ and 9.8% YoY as Starbucks Malaysia achieved an 8.0% SSSG growth coupled with a 2.5% SSSG growth in KRR due to the successful promotional period. 2. Comparing 9MFY19 against 9MFY18, topline rose 6.0% on the back of a strong 3Q performance as well as an additional 27 Starbucks stores, bringing the total number of outlets to 282 (vs. 255 in 9MFY18). Starbucks’ 9MFY19 revenue increased 11.5% while KRR’s dropped 11.3%. Starbucks’ stellar performance was due to its successful promotions further buoyed by its 20th anniversary celebration promotions and a more popular merchandising. 3. 9MFY19 EBITDA climbed 14.1% YoY while EBITDA margin improved 1.1ppts to 15.2%. We opine that this is on the back of lower coffee prices as shown in Exhibit 2 (-12.6% YoY) and a stronger MYR against the USD as shown in Exhibit 3 (+1.8% YoY). The growth was enhanced by KRR’s turnaround in 3QFY19 where it achieved EBIT of RM0.05mil (-RM2.7mil in 9MFY19 and –RM3.3mil in 9MFY18).

• We believe BFood will continue to perform into 4QFY19 albeit at a slower momentum compared with 3QFY19 as 3Q is typically the company’s seasonally strongest quarter. In our forecast for FY20F, we estimate SSSG of 4.3% and EBITDA margin of 13.5%. Key risks to our forecast include store expansion delays, slower-than-expected turnaround of KRR and a sharp appreciation in raw materials costs.

Source: AmInvest Research - 15 Mar 2019