Investment Highlights

• We maintain our BUY call on Berjaya Food (BFood) with a higher fair value (FV) of RM2.16/share (from RM1.72/share previously).

• We have raised BFood’s net earnings forecast to account for a stronger-than-expected sales growth. Our FV is based on an unchanged PER of 17x on FY22F EPS. Our FV also incorporates a 3% price premium for our ESG rating of 4 stars.

• BFood’s 9MFY21 net profit of RM33.1mil is above expectations, making up 95% and 93% of our and consensus expectations respectively. 3QFY21 brought in RM11.6mil, amongst the highest ever recorded profits. Both Starbucks and Kenny Rogers Roasters (KRR) posted solid results despite movement restrictions in 1Q2021.
   
• We expect this momentum to continue onto the next quarter. As a result, we have raised our earnings forecasts for FY21E/FY22F/FY23F by 29%/22%/17% respectively.
• Changing consumer preferences and elevated profitability margins bode well for the group’s outlook. We believe that the return of in-store consumption will start to improve revenue yields by FY22F.

• Going forward, we are optimistic on growth driven by the opening of 25 to 30 new Starbucks outlets annually, KRR’s stronger performance and the group’s shift towards leaner store formats and ghost kitchens (no dining space, prepare only delivery meals). A recovery in travel restrictions would also benefit outlets located in shopping malls, highways, airports and tourist destinations.

• We believe the Starbucks brand in particular is well suited to capitalize on consumer’s preference for takeaway and delivery. This is due to the brand’s effective advertising campaigns to a predominantly indoor population, ability to reach out to multiple customer segments and estimated sizeable contributions from its loyalty programme customer base.

Financial results

• BFood’s 3QFY21 revenue saw a return to prepandemic levels. At RM182mil, the group saw a growth of 15% YoY and 4% QoQ. 9MFY21 revenue of RM537mil rose by 3% YoY. We attribute this to higher Starbucks store count, MCO 2.0’s looser movement restrictions as well as increased consumer willingness to order takeout or delivery.

• Starbucks and KRR saw a YoY SSSG of 15% and 3% respectively for 3QFY21, although from a low base. It is worth noting that the average sales per store figures have yet to fully recover, as footfall still remains depressed (especially in mall outlets). We believe that average ticket price has risen as consumers choose to make less trips and to justify high delivery costs.

• BFood recorded quarterly EBIT margins of 13% to 15% in the first three quarters in FY21E. In comparison, pre-pandemic EBIT margins were in the 6% to 8% range. Rental rebates and leaner store formats contributed to the rise in EBIT margins, particularly Starbucks’ drive-through format.

• BFood’s foreign contribution remains underwhelming, with a RM20mil revenue and RM0.3mil loss in 3QFY21. We attribute the poor results to lower footfall.

• BFood has announced a third interim dividend of 1.0 sen/share, bringing the total to 2.0 sen/share in FY21E.

Starbucks

• Starbucks is slated to open more drive-through and Reserve format stores, given their lower payback periods than the 2.5 to three years required by core stores. Drive-through stores are estimated to have half the payback period. We believe that of the seven to eight remaining Starbucks stores are expected to be opened in FY21E, with at least 50% in drive-through format. Currently, there are 55 drive-through stores.
   
• We believe that Starbucks outlets are still far from saturation in the Klang Valley, given the group’s ability to open multiple types of store or build one on a smaller site capacity. About 55% of Starbucks stores are centred in the Klang Valley. Assuming the current Klang Valley population is 12mil, this gives an approximate average population per store ratio of 65K in end-FY21E.
   
• We like Starbucks for its willingness to reach out to multiple customer bases. Its Reserve format stores appeal to a population seeking higher end and artisanal experience. Also, BFood frequently partners with celebrities and icons with large follower bases, including Datuk Fazley Yaakob (chef/singer/actor) and Royal Selangor.

• We award BFood a 4-star ESG rating. This is premised on Starbucks’ strict ethical sourcing policies, waste management campaigns and willingness to hire individuals with hearing disabilities for its special “signing stores”.

KRR and Sala

• Going forward, we expect KRR’s EBIT contribution to remain positive. While KRR is still likely to be lossmaking in FY21F, we note that its EBIT has remained positive for the 3rd quarter in a row, as opposed to the predominately negative pre-pandemic figures. KRR’s closure of underperforming stores in addition to cost management initiatives seem to have reduced costs.

• We expect KRR to open two stores and close two to three stores in 4QFY21. The group is targeting to open in residential areas, especially neighbourhood malls.

• BFood’s new business venture Sala, a vegan TexMex restaurant, is not expected to provide meaningful earnings contributions for now. The group operates three functional restaurants, targeting to open three more in FY21F.

Source: AmInvest Research - 7 May 2021