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

-  At 33% of our full-year forecast, BFood’s 1HFY14 core net profit of RM10mil (+58% YoY, -15% QoQ) came below our expectations. A first interim dividend of 1.75sen/share was declared.

-  While the group achieved healthy same-store sales growth (SSSG) of 3.5% for Kenny Rogers Roaster (KRR) in Malaysia and 4% for KKR in Indonesia in 1HFY14, the shortfall against our earnings forecast was due to:- (1) no group tax relief as BFood is no longer a 70% subsidiary of Berjaya Corporation; and (2) softer consumer sentiment in anticipation of subsidy cuts (rising fuel and electricity tariff hike) and GST announcement.

-  As such, we have trimmed our FY14F-FY16F earnings forecasts by c.15%. KRR Indonesia’s accelerated expansion will further boost earnings growth momentum once operations breakeven in FY15F.

-  1HFY14 earnings surged on the back of the consolidation of Starbucks Coffee and Jollibean. On a quarterly basis, revenue declined as 2Q is traditionally the weakest quarter. Apart from the losses at KRR Indonesia, several KRR outlets in Malaysia were affected by renovations and construction works carried out in the vicinity.

-  Nevertheless, the bulk of earnings will come in 2HFY14F, buoyed by seasonal stronger consumer spending during the year-end festive seasons and school holidays.

-  Store expansion plans are coming along nicely with 36 confirmed sites to-date:- KRR Malaysia (9 stores), KRR Indonesia (8 stores), Starbucks Malaysia (10 stores), Starbucks Brunei (3 stores), Jollibean Singapore (4 stores), and Jollibean Malaysia (2 stores).

-  BFood remains as our top BUY underpinned by:- (1) excellent play on consumption growth, backed by its regional footprint and strong franchise value; (2) earnings kicker from the turnaround of KRR Indonesia in FY15F; and (3) direct leverage to the exponential expansion of Starbucks Coffee supported by its double-digit SSSG and widespread sales channel.

-  At 20x FY14F’s fully-diluted PE, BFood’s premium valuation is justified given its infrastructure building phase, and its strong future earnings growth due to its regional expansion (robust 3-year earnings CAGR of 26%).

Source: AmeSecurities