Investment Highlights

• We maintain our BUY call on Berjaya Food (BFood) with a lower FV of RM1.57 (vs. RM1.95/share previously). We have cut our full-year earnings forecast for FY20F, FY21F and FY22F by 21.4%, 17.9% and 13.0% respectively. This is to account for the impact of the MFRS 16 on BFood. Our valuation is pegged to a P/E of 25x CY20F which is 2SDs above its historical 1 year forward P/E.

• BFood’s 1QFY20 core net profit of RM4.6mil is below our and street’s full-year earnings forecast accounting for 16.7% and 15.3% respectively. The deviation was mainly due to the adverse effect of the MFRS 16 which resulted in a higher depreciation and interest expense. Excluding the MFRS 16 impact, PBT would have been RM10.8mil (RM8.6mil with the MFRS 16 adoption).

• 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, a slower-than-expected turnaround of KRR and a sharp appreciation in raw materials costs.

• 1QFY20 revenue was RM180.4mil (+9.5% YoY based on our calculations). Starbucks’ revenue grew 10.5% YoY to RM151.0mil in 1QFY20 while KRR fell marginally by 0.2% to RM20.0mil and Jollibean’s revenue grew 3.1% to RM6.1mil.

• We believe sales improved on the back of the additional 34 Starbucks stores (303 stores) although SSSG remained flattish. Jollibean enjoyed a 1% SSSG and is on track for further growth as its franchisee has opened several stores. BFood has also introduced Kopi Alley Plus, a three-in-one concept store in Singapore, which is expected to further buoy its Singapore operations. On the other hand, KRR’s revenue dropped marginally by 0.2% as SSSG fell by 2% YoY in 1QFY20.

• BFood’s EBIT of RM15.7mil (+5.4% YoY) brought EBIT margin to 8.7% (circa 9.0% previously). Starbucks’ EBIT grew marginally by 1% YoY to RM17.2mil in 1QFY29 while Jollibean’s EBIT dropped to a loss of RM63K (-RM9K previously). KRR’s loss before interest and tax narrowed to RM1mil (-RM1.3mil previously).

• We believe the margin was largely impacted by the 1.7% YoY weakening of the MYR against the USD but offset by the 5.2% YoY drop in coffee prices in 1QFY20.

• We look forward to the upcoming quarter which is expected to be stronger on the back of the holiday season buoyed by effective promotions. We anticipate Starbucks’ sales to improve with the new Christmas launch As for KRR, we anticipate a lower loss in FY20F. 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 - 12 Nov 2019