Investment Highlights

• Berjaya Food (BFood) announced the sale of KRR Indo. Although it was a slight delay, we are positive over the development as it removes the earnings variability tied to a multi-year loss-making Indonesian entity. Maintain our BUY recommendation and higher fair value RM1.91/share (from RM1.77/share) in account of our revised earnings. Valuations are pegged to P/E of 25x FY19F aligned to its historical valuations.

• BFood through its subsidiary, Berjaya Food International, entered into an agreement to dispose of its entire stake of 99.9% in PT Boga. It is effectively Kenny Rogers Roasters (KRR) Indonesia. The disposal is to Rudy Wiguna and Komelia Ersan in return for a token sum of IDR1,000 (RM0.32).

• The token sum consideration was arrived at on a willingseller willing-buyer basis after accounting for the past yearly losses and shareholders’ deficit of RM36.75mil as at 31 Aug 2017. The acquirers will resume KRR Indonesia and pay royalties accordingly, to Berjaya Corp going forward. Berjaya Corp is the global master franchise holder of KRR.

• In terms of valuations, we think it is fairly reasonable. Token consideration apart, the acquirers will be liable for RM3.1mil of debt to BFood in return for the network of 10 stores. At RM310K per store, it is in the region of standard capex of RM400K-500K per store. Recall, these stores may be suboptimal as KRR Indo has been loss making for more than 5 years (FY15/16/17: -RM6.4/-5.2/-9.3mil).

• Following the disposal, management has guided that BFood will recognise a one-off loss on the disposal of RM12mil in 3QFY18 despite the transaction being announced in 2QFY18.

• The timing of the announcement deviates from our expectations by end-2QFY18 (Oct). We understand from management that this is due to an extended approval process taken by Indonesian authorities. However, it was a much-awaited announcement the KRR Indo sale has been deliberated, mooted and rumoured for years.

• We are adjusting our FY18F/19F earnings by 5%/7% following the disposal of KRR Indo. Aside from that, we expect BFood’s historically elevated effective tax rate (3- year avg: 63%) to be curtailed to 35% going forward.

• Aside from KRR Indo, we had earlier expected for Jollibean to be disposed of by 3QFY18. However, we understand that it has been placed on the back burner. This is due to the intention to realise the greater inherent strategic value tied to the Singapore-based asset.

• We continue to like BFood for its attractive growth off a low base, the innovative Starbucks brand and upcycle in consumer sentiment. Key risks to our forecast are losses at KRR Malaysia and Jollibean.

Source: AmInvest Research - 27 Nov 2017