Investment Highlights

• We maintain our BUY call on Berjaya Food (BFood) with an unchanged FV of RM2.05/share. 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.

• BFood’s core net profit of RM26.3mil (+58.9% YoY) met our expectations but missed street’s estimates by 9%.

• We continue to like BFood on the back of its stellar Starbucks brand, planned store expansions and efforts in turning around Kenny Rogers Roasters (KRR). Key risks to our forecast include store expansion delays, slowerthan-expected turnaround of KRR and a sharp appreciation in raw materials costs.

• Here are the key highlights of BFood’s 4QFY19 results:

• Comparing 4QFY19 against 3QFY19, BFood’s revenue slid 5.9% to RM169.9mil (RM180.5mil in 3QFY19) while EBITDA dropped 20.9% to RM22.3mil (from RM28.2mil). 3Q is typically BFood’s strongest due to year-end festive promotions, school holidays and the Christmas season.

• FY19’s revenue grew 6.0% YoY to RM678.4mil (RM639.7mil in FY18) on the back of better performance from Starbucks although offset by the drop in KRR and Jollibean.

• Subsequently, EBITDA improved 11.5% YoY to RM99.9mil (RM89.5mil in FY18) in FY19 as a result of better sales and a 0.7ppt increase in EBITDA margins to 14.7% (14.0% in FY18). We opine that this was due to lower coffee prices (Arabica -20.0% YoY) and further enhanced by KRR’s smaller losses.

• Starbucks’s revenue climbed 10.7% to circa RM559.0mil while its EBIT grew 9.4% YoY to RM 69.6mil (from RM63.6mil) in FY19 as SSSG improved by 4.0% on the back of better promotions, stronger merchandising as well as additional 28 Starbucks stores, bringing the total number of outlets to 288 (vs. 260 in FY18).

• KRR’s revenue dropped 9.6% YoY to RM83.8mil in FY19 (RM92.7mil in FY18) on the back of lower store counts of 78 (81 stores in FY18) as well as negative SSSG of 3%. This resulted in a smaller loss of RM5.3mil in FY19 (from – RM7.5mil in FY18).

• We believe BFood will continue to perform well going forward on the back of favourable raw material prices and planned expansions (25 Starbucks stores, 10 KRR stores and 10 Jollibean stores). The risk is the appreciation of the USD against the MYR as 50% of the group’s raw material costs are in USD.

Source: AmInvest Research - 14 Jun 2019