Investment Highlights

• We believe the worst is over for Berjaya Food (BFood) with KRR’s robust SSSG and completed corporate exercise. It also benefits from a stronger MYR. We maintain our BUY recommendation and fair value of RM1.91/share.

• Valuations are pegged to a P/E of 25x FY19F, reflecting a 20% premium to its historical valuations. We think that it is justified as BFood has significantly enhanced earnings visibility following the disposal of KRR Indo, attractive growth off a low base and a stellar Starbucks brand.

• BFood reported a 2QFY18 net profit of RM5.8mil (QoQ: 8.9%, YoY: 15.5%) bringing 1HFY18 net profit to RM11.2mil (YoY: 11.1%). It was in line with ours and consensus at 52% of both estimates respectively.

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

• Key highlights of BFood’s results included:

i) Starbucks’ performed respectably, growing in the mid-teens. This was off sustained SSSG of 3.0% coupled with 9% more stores (2QFY18: 248). We expect 2HFY18 to make up for the seemingly shortfall in YTD store expansion amounting to 9 stores (vs. full year addition: 25 stores).

ii) KRR Malaysia registered a robust 8.7% SSSG for the quarter. Management’s turnaround efforts, specifically new marquee “OMG Unfried Fried Chicken”, streamlined menus and more affordable set lunches are coming to fruition. Off the back of its instore initiatives, KRR Malaysia is expected to add 3-5 stores to its existing 81 stores by end-FY18. Furthermore, it has reached the tail end of its store rationalisation initiative, lowering the possibility of asset impairments.

iii) There was recognition of KRR Indonesia contribution despite disposing of the asset on 24 Nov 2017. It had an operating loss of RM0.7mil as SSSG trended lower at -10% YoY for the quarter. Instead, there will be a one-off recognition of loss on disposal amounting to RM12-13mil in 3QFY18.

iv) Jollibean registered flat earnings growth for the quarter despite 15% lower revenue. This was in line with 17% fewer stores. We expect the trend to persist – narrowing losses heading into 2HFY18 with fewer non-performing stores (2HFY17: -RM2.1mil).

• We maintain our earnings estimates as earnings have fallen in line with our expectations. Key risks to our forecast include slower than-expected turnaround at KRR Malaysia and impairments related to unexpected store closures.

Source: AmInvest Research - 14 Dec 2017