- We reiterate our BUY recommendation on Berjaya Food (BFood), with an unchanged fair value of RM2.30/share, based on our DCF-based valuation.

- We came away from the company visit with a more upbeat view on BFood as it is an excellent play on consumption growth (robust 3-year earnings CAGR: 32%) given its regional presence and strong franchise value.

- The expansion of its store count remains well on track with 36 confirmed sites to-date:- Kenny Roger Roaster (KRR) Malaysia: +9, KRR Indonesia: +8, Starbucks Malaysia: +10, Starbucks Brunei: +3, Jollibean Singapore: +4 and Jollibean Malaysia: +2.

- The increase in product prices for KRR Malaysia (from FY14 onwards) has resulted in a same-store-sales growth (SSSG) of 4% in September, a turnaround from FY13’s -2%. To strengthen sales further (i.e. draw crowd to dine more frequently at KRR), a loyalty program will be implemented in FY15F.

- KRR Indonesia also achieved a SSSG of 4% in September. The accelerated expansion in Indonesia will further boost its growth momentum once operations break-even in FY15F.

- Jollibean is finally expanding its footprint into Malaysia. Its maiden store is earmarked to open in Berjaya Times Square in November, followed by another one in Sunway Pyramid in December. Franchising is expected to only begin after the group has opened six company-owned stores. Should the operations in Malaysia become successful, the group would venture into China with the Jollibean brand.

- Another positive revelation is that Starbucks Coffee has continued to sustain its double-digit SSSG for four consecutive years. Despite the rising trend of small speciality coffee players in the country, Starbucks should be able to sustain its impressive SSSG, underpinned by a widespread sales channel (150 outlets nationwide) which is exponentially expanding.

- Its recently formed JV (with an 80% stake) to bring Starbucks into Brunei will enhance its medium-to-long term earnings. The maiden outlet to be opened in January next year with plans to increase to store count to 10 in five years. Given the small scale operation, a district manager will be sent from Malaysia to oversee and manage the operations (similar arrangement with East Malaysia). BFood will fund its portion in the JV via internal funds, payable over two years (RM3.1mil p.a.).

- From a valuation standpoint, BFood is trading at 19x of FY14F’s fully-diluted PE. BFood deserves a premium valuation as it is in its infrastructure building phase with strong future earnings growth. More importantly, it is viewed as a direct leverage and a cheaper proxy to Starbucks Corp (SBUX US Equity), which is trading at a high PE of 38x.

Source: AmeSecurities