Investment Highlights

• We maintain our BUY call on Berjaya Food (BFood) with a slightly lower FV of RM1.55/share (RM1.57 previously). We roll over our valuations from CY20F to FY21F and lower our P/E multiple to 22x (25x previously) to reflect the updated 3-year average historical forward P/E.

• BFood’s 1HFY20 core net profit of RM12.6mil came in at 58.1% and 48.6% of our and consensus’ full-year earnings forecasts. We view this as in line with our estimates as we expect 2H to be weaker than 1H due to the seasonality factor (BFood’s strongest quarter is 4QCY19, which takes place during the holiday season).

• 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.

• 1HFY20 revenue was RM364.6mil (+7.0% YoY based on our calculations). Starbucks’ revenue grew 8.2% YoY to RM304.0mil in 1HFY20 while that of KRR’s fell by 1.1% to RM42mil.

• We believe Starbucks’ sales improved due to new store openings in 1HFY20. 18 stores were added, making up 309 Starbucks stores in 2QFY20 (248 core stores, 50 drivethrough stores and 11 reserve stores). However, SSSG was flattish for Starbucks in 1HFY20.

• Jollibean’s and KRR’s SSSG slid 1% and 3% respectively. The number of stores under KRR and Jollibean remained almost the same. KRR has 81 stores (74 core stores, 1 drive-through store and 6 express stores) while there are 31 stores under Jollibean (20 Jollibean stores, 9 Sushi Deli, 1 Kopi Alley and 1 Kopi Alley Plus).

• Comparing 2QFY20 with 1QFY20, BFood’s revenue grew by 2% to RM184.1mil. Starbucks’ revenue climbed 1.3% to RM153.0mil while that of KRR’s expanded 15.0% to RM23mil despite a -4% SSSG. Jollibean’s revenue was flattish at RM6.2mil (RM6.3mil in 1QFY20).

• BFood’s 2QFY20 EBIT of RM20.2mil (+28.3% QoQ) brought EBIT margin to 11.0% (+2.2ppt). Starbucks’ EBIT grew 2.3ppt to 13.7%.

• On other hand, Jollibean’s EBIT dropped further to a loss of RM704K (RM387K previously). KRR turned EBIT positive and made RM350K (loss of RM1.0mil previously). We believe the improvement in margins was in tandem with a better promotional strategy during the holiday season.

• We expect the subsequent quarters to be soft largely due to seasonality. In 3QFY20, we expect sales during the New Year holiday and Chinese New Year festivities to support BFood’s store performance. However, we see a short-term negative effect due to the recent Wuhan virus outbreak, which would impact the patronage of Bfood’s stores by both locals and tourists.

• We believe the outbreak would improve Starbucks and KRR’s delivery service sales. However, the impact is expected to be minimal as only around 1% of Starbucks and 10% of KRR sales are through delivery.

• Beyond 3QFY20, we expect BFood’s performance to be affected by the fasting month in 4QFY20, which would result in weaker sales numbers. We believe the sales growth going forward will be driven largely by the opening of new stores. BFood plans to open up at least another 15 Starbucks stores in 2HFY20.

• We believe BFood’s margins will also be affected by rising raw material prices as shown in Exhibits 2 and 3. Comparing YTD with 2019, prices of Arabica coffee have risen 11.9%, robusta coffee is down 4.1%, cocoa is up 11.6%, raw sugar has climbed 14.8% while milk powder is 1.4% higher.

• However, we expect KRR’s improving profitability to partly mitigate the pressure on margins. We have already accounted for the weaker 2H in our FY20F forecasts. We expect net margins of 2.8% and 3.3% in FY20F and FY21F respectively (3.1% in 14MFY19).

• Recall that The Edge Financial Daily has reported that Berjaya Group is in preliminary talks to dispose of a substantial stake in Kenny Rogers International’s business to a foreign party. The business owns the worldwide franchise rights for the KRR brand. We view this as neutral to BFood as we expect its KRR operations will remain status quo.

• However, if this were to lead to the disposal of KRR business under BFood, we believe it will be positive for the group as KRR has been in the red since 2017. In 14MFY19, BFood’s KRR business under Berjaya Roasters reported a loss after tax of RM6.7mil.

Source: AmInvest Research - 7 Feb 2020