Investment Highlights

• We maintain our BUY call on Berjaya Food (BFood) with a higher fair value (FV) of RM3.30/share (from RM2.23/share previously) based on revised earnings. Our FV implies a PE of 14x CY2022. We are changing our valuation method to DCF, from a relative valuation of 17x FY22F target PE. Our FV also incorporates a 3% price premium for our 4-star ESG rating.

• Beat expectations. BFood’s 2QFY22’s net profit of RM38.9mil (+250% YoY, 234% QoQ) was above our and consensus’ expectations. 1HFY22 net profit of RM50.5mil (+135% YoY) made up 100% and 88% of our and consensus expectations respectively. The positive variance was mainly attributed to the pent-up demand following the easing of movement restrictions, benefitting its Starbucks and Kenny Rogers Roasters’ (KRR) operations. Aggressive new Starbucks store openings (+14 new outlets) during the quarter and seasonal promotional activities also helped to boost sales.

• Earnings revision. Post-results, we have increased our earnings forecast for FY22F-24F by 72%, 46%, and 40% respectively after imputing a more bullish sales assumption due to return of footfalls from the reopening of the economy. The company’s future earnings growth also will be supported by the opening of new Starbucks outlets and turning around of KRR operations through the relocation of its stores and revamp of product offerings.

• The outperformance of BFood’s Starbucks operation displayed the effectiveness of the company’s strategy in generating consumer interest through switching up outlet formats, leveraging third-party delivery services, and change in customers’ loyalty reward programme, while capitalizing on the reopening of the economy. We believe that the improvements made to the Starbucks business model demonstrated the management team’s versatility and have positioned the group for stronger outlet performances.

Financial Results

• The group posted a quarterly revenue of RM272.8mil in 2QFY22, 57% YoY and 45% QoQ stronger. Starbucks Malaysia remained the key revenue contributor at 88% of total sales (vs. 2QFY21: 87%). KRR also performed better on a QoQ basis as the company’s marketing initiatives are bearing fruits.

• BFood reported a significantly higher PBT of RM60.3mil (+249% YoY, +217% QoQ), underpinned by stronger sales and margin expansion. PBT margin grew 12 ppts to 22% mainly driven by improvement in operating leverage, in our view.

• Dividend. BFood declared a second interim dividend of 1.0 sen/share, bringing the total to 2.0 sen/share for FY22, implying a payout ratio of 14%.

• We change our valuation method to discounted cash flow (DCF) (free cash flow-to-equity) method from a relative valuation of 17x target PER of FY23F EPS previously. We believe the DCF method better captures the medium-to-long term prospect of the company and would allow us to incorporate any key changes in the business strategy into our valuation. Our key assumptions for the DCF valuation are: i) terminal growth rate of 1.5%; and ii) WACC of 5.8%.

Store Details

• The company is on track to achieve its target of opening 38 new Starbucks stores in FY22F. As of 1HFY22, it has opened 18 new outlets (14 stores in 2QFY22 and 4 in 1QFY22) while closing two, bringing its total number of stores to 343. Recall that store openings in 1QFY22 were affected by the movement control order as these delayed renovation works of the new outlets. We could expect more aggressive store openings in 2HFY22.

• BFood continues to streamline KRR operation. It closed two non-performing KRR stores and opened one new outlet during the quarter.

Source: AmInvest Research - 11 Feb 2022