Investment Highlights

• We maintain our BUY call on Berjaya Food (BFood) with a higher DCF-based fair value (FV) of RM1.25/share (from RM1.03/share). Our FV implies FY23F PE of 15x – at parity to its 3-year mean. We made no changes to our 4-star ESG ratings, which reflects a 3% premium (Exhibit 3).

• We raise BFood’s FY23F earnings by 11.3%, FY24F by 16.7% and FY25F by 17.6%, after factoring in higher margin assumptions for Kenny Rogers Roasters (KRR) and Starbucks Malaysia operations as well as housekeeping exercise.

• Our earnings revision has also taken into account the contribution from its newly commissioned Paris Baguette bakery, albeit minimal at this juncture. To recap, Paris Baguette Malaysia is a 50:50 joint venture (JV) with Paris Baguette Singapore plc, in which BFood holds exclusive rights as the local operating license.

• Key updates following our recent channel checks:
  • The first Paris Baguette Malaysia outlet opened at Pavilion Bukit Bintang on 18 January 2023. It is a SouthKorean premium bakery café concept.
  • A second outlet is in the pipeline, potentially at Pavilion Bukit Jalil within a few months. The group is in the midst of site-surveying and planning to open 5 stores per annum with a capex of RM10mil earmarked for 2023. Banking on its successful global footprint with more than 4,000 stores worldwide, we expect the café chain to contribute positively to the group over the longer term.
  • KRR’s performance in 2021 and 2022 were commendable as it managed to reduce operating loss by 83.8% in 2021 to RM2mil and turned around in 2022 with operating profit of RM8mil despite continuing high chicken prices, mainly due to effective cost optimisation. The group envisions to continue maintaining 1QFY23 operating margin of 20% (+7.9%- point QoQ).
  • For Starbucks Malaysia, BFood conducted a price adjustment in December 2022 to briefly offset persistently high raw material prices. The group imported 55% of its raw materials and sourced the rest locally, which are mainly food and milk. Food category made up 15%-20% of its total cost of goods sold.
• We expect the performance of Starbucks Malaysia to remain resilient, counting on its continuous store network expansions coupled with prudent cost optimisation. This is evident in its proven ability to sustain mid-to-high teen operating margin level in 1QFY23 (+17.4%-point YoY and +5.2%-point QoQ). Moreover, the reopening of China borders is expected to attract more footfalls from the return of cash-rich Chinese tourists.

• The group currently trades at a compelling FY23F PE of 13.3x, 1 standard deviation below its 3-year mean of 15x.

Source: AmInvest Research - 30 Jan 2023