Investment Highlights

• We maintain our BUY call on Berjaya Food (BFood) with a lower FV of RM1.95/share (RM2.05/share previously). We lower our sales growth and margin assumptions and introduce FY20F, FY21F and FY22F forecasts based on FYE June. Our valuation is pegged to a P/E of 25x CY20F which is in line with its average historical forward P/E.

• BFood’s 5Q2MFY19 core net profit of RM203K brought 14MFY19 core net profit to RM26.509mil which is weaker than expected largely due to a lower sales growth, EBITDA margin and higher effective tax rate.

• As BFood has recently changed its financial year-end from April to June, there are no consensus numbers available.

• 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.

• 5Q2MFY19 revenue was RM110.8mil with EBITDA of RM11.6mil. This brought EBITDA margin to 10.4% (vs. 14.2% in 1Q19). The weakness was mainly due to lower sales in the fasting season (May–Jun 2019).

• Starbucks’ 5Q2MFY19 revenue was RM91mil (vs. RM 132.5mil in 1Q19) as May–Jun 2019 SSSG dropped 2.5%. This resulted in EBIT of RM16.1mil with EBIT margin of 11.4% (13.1% in 1QFY19).

• We believe this was mainly due to a high base in 2018 where consumer sentiment and spending rocketed on the back of post-elections high, 2 additional public holidays in May 2018 and 0% GST in June 2018.

• Kenny Rogers Roasters posted a revenue of RM7.7mil in 5Q2MFY19 (RM17.4mil in 1QFY19) as SSSG dropped 5%. This resulted in a loss before interest and tax of RM2.0mil (loss of RM1.7mil in 1QFY19). We believe KRR was also affected by the above.

• We anticipate its Starbucks’ sales to improve in the upcoming quarters but at a slower rate than initially expected (assume 2-3% SSSG vs 4-5% previously). As for KRR, we anticipate closures of poor performing stores. We anticipate a lower loss in FY20F.

• Its net profit margin in 5Q2MFY19 was only 0.2% compared to 3.9% in 1QFY19. This was due to higher effective tax rate of 93.9% as the group faced losses in its KRR and Jollibean operations.

• We believe BFood’s performance will improve going forward on the back of planned expansions (25 Starbucks stores, 10 KRR stores and 10 Jollibean stores) although it may be slightly dragged by a volatile USD/MYR. The risk is the sharp appreciation of the USD against the MYR as 50% of the group’s raw material costs are in USD.

Source: AmInvest Research - 21 Aug 2019