Investment Highlights

• We believe Berjaya Food’s (BFood) risk factors such as a weakening MYR, poor performing stores and soft patches of SSSG have diminished. Turnaround in BFood could be capped with the sale of its non-performing assets in FY18. We maintain our BUY recommendation and fair value of RM1.77/share despite upgrading FY18 earnings as our valuations are pegged to FY19F.

• Valuations are pegged to a P/E of 25x, reflecting a 20% premium to its historical valuations. We think that it is justified as BFood is on the cusp of a revival, independent of a potential restructuring exercise, attractive growth off a low base and a stellar Starbucks brand.

• BFood registered a 1QFY18 net profit of RM5.3mil (YoY: 6.7%). It was in line with consensus but above our expectations at 20% and 28% of estimates respectively.

• Declaration of a 1.0 sen/share dividend was within our expectations.

• Key highlights of BFood’s results included:
  1. Starbucks’ operating earnings growth of c:20% outstripped its revenue growth of c:10%. While a 10% larger store base (1QFY18: 242) against the preceding comparable quarter supplemented revenue, Starbucks’ healthy SSSG of 2.2% was instrumental to earnings growth. We believe that resilient demand has underpinned BFood’s successful navigation around its c:10% ASP hike in 4QFY17.
  2. On a negative note, we are disconcerted over the widening losses of BFood’s remaining non-performing assets including KRR Malaysia and KRR Indonesia. The losses amounted to RM1.5mil in 1QFY18. Meanwhile, Jollibean narrowed its losses.

• Outlook on BFood:
  1. BFood only saw the expansion of 2 stores (vs. 25 new stores over FY17) in 1QFY18. However, we expect the bulk of new stores to come onstream in 2Q leading to the peak of Starbucks' sales in 3Q.
  2. We expect the turnaround initiatives at KRR Malaysia to be fully realised in FY19F. These include menu rationalisation, lowering ASPs to increase affordability and rolling out cafeteria-style service to lower labour dependence. While the gradual rollout will commence in 2HFY18, it will only be immediately implemented in its 5 new slated outlets.
  3. Management remains equally optimistic over the disposal of its non-performing assets, i.e. KRR Indonesia and Jollibean, since our last visit to management a month ago. Proceeds from the disposal would be used to pare debt and may result in a special dividend. By our estimates, FY18/FY19 earnings could be lifted by 19%/25% respectively excluding impairments. We see the potential sale of the assets to lift sentiment and catalyse BFood’s valuations.

• We lift our FY18 earnings by 13% to reflect healthier-thanexpected margins. Key risks to our forecast include slowerthan-expected turnaround at KRR Malaysia and impairments related to unexpected store closures.

Source: AmInvest Research - 18 Sept 2017