• We maintain our HOLD recommendation on Berjaya Food (BFood) with a higher fair value of RM1.43 (from RM1.40) after rolling over our valuations to CY18F. It is pegged at a fully diluted PE of 19x or its 5-year historical mean. While Starbucks’s performance remains commendable, BFood’s may continue to see challenges in turning around its remaining segments of KRR and Jollibean.

• We trim our earnings largely to account for softer margin assumptions. Factoring in our new assumptions, BFood's earnings are adjusted downwards by 18% and 2% for FY18F and FY19F respectively. Key risks to our forecast are further impairments in line with store closures and widening losses in KRR and Jollibean.

• BFood reported a 4QFY17 core loss of RM3.4mil (4QFY16: RM3.2mil) dragging FY17 net profit to RM11.3mil (-50.4%). It fell short of our and consensus earnings estimates at 57% and 52% respectively. There was a RM5.1mil impairment during the quarter that compounded the shortfall in earnings.

• No dividend was declared for the quarter. Cumulative dividend amounted to 3.5 sen/share, short of our expectation of 4.5 sen/share.

• The earnings shortfall from our estimates was due to: 1) impairments amounting to RM5.1mil arising from the store rationalisation exercise, which saw 11 stores shuttered; 2) KRR Indonesia store closure decelerated; and 3) back-loaded vested employee options. Starbucks' demand was more resilient than we initially thought, posting a flat SSSG despite higher ASPs. Recall, postGST implementation in 2015, SSSG contracted by 7.0%.

• Meanwhile, we are convinced Starbucks' growth remains firmly intact with recent SSSG proving resilient amidst improving consumer sentiment. We are factoring an addition of 25 stores for FY18F and an SSSG of 2.0% (FY17F: 0.0%). The strengthening of the MYR against the USD would alleviate margins as 50% of raw material is purchased in USD.

• However, we expect headwinds as BFood attempts to turn around its remaining segments. KRR Indonesia may only realise a turnaround in FY19F. Despite registering SSSG of 2.3%, it led to a YTD decline in RM9.3mil EBIT earnings. Compounding the issue, store rationalisation is uncertain as leasing proves to be a limiting factor. On the other hand, KRR Malaysia should perform better heading into FY18F seeing that it is at the tail-end of store closures. We expect Jollibean to face stiff competition in Singapore.

Source: AmInvest Research - 15 Jun 2017