Investment Highlights

• We maintain our BUY recommendation on Berjaya Food (BFood) with a higher fair value of RM2.17 (from RM1.91), as we roll over our valuations to CY19F from FY19F, pegged to a P/E of 25x. It reflects 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 3QFY18 core net profit of RM4.5mil (QoQ: -22.0%, YoY: -3.0%) bringing 9MFY18 net profit to RM15.7mil (YoY: 6.6%). It came in line with ours but below consensus earnings estimates at 73% and 62% respectively.

• The declared interim dividend of 1.0 sen/share was in line with our expectations.

• Berjaya Food results highlights include:

1. For the quarter, headline earnings saw a loss of RM10.8mil. This was due to a RM15.4mil one-off loss arising from the disposal of KRR Indo. The transaction was successfully completed by Nov 2017.

2. Starbucks’ SSSG for the quarter was relatively muted at 0.5%. This was due to a timing mismatch of the Lunar New Year, against the corresponding period falling in 4QFY18 instead of the 3QFY17.

3. KRR Malaysia SSSG took a steep negative turn to - 10%. Aside from the aforementioned festivity mismatch, the menu overhaul exercise lowered ASPs by 20%. Going forward, management expects lower discounting and promotional exercises to restore instore sales. We are underwhelmed over KRR Malaysia’s performance as it had displayed signs of a turnaround, registering 4 quarters of robust growth previously. However, we think it was necessary to draw foot traffic and attention to KRR’s revamped product offerings.

4. We understand a change in management over at Jollibean is aimed at stemming the decline. The recent quarter saw losses narrowed to RM0.2mil from RM1.1mil.

5. EBITDA margins were resilient, improving by 1.7ppts to 14.4%. This was primarily due to narrowed losses from KRR Indo and Jollibean.

• We maintain our forecast as earnings were within estimates. Key risks to our forecast include store expansion delays, slower-than-expected turnaround at KRR Malaysia and impairments related to unexpected store closures.

Source: AmInvest Research - 16 Mar 2018