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

- BFood is expected to deliver consistent earnings growth underpinned by its strong franchise value. Its 3-year earnings CAGR of 26% is well supported by regional expansion plans.

- While slower consumer spending is anticipated in Malaysia, we expect BFood’s earnings to remain stable and resilient due to its:- (i) well diversified business portfolio given the exposure in various markets; (ii) Kenny Rogers Roaster Malaysia’s (65% of revenue) halal certification which allows it to serve the larger population in the country; and (iii) robust double-digit same-store-sales growth for Starbucks.

- Despite a more challenging operating environment, BFood’s expansion pipeline and execution remained healthy (see Table 1). Take note of the group’s successful maiden forays into Malaysia for Jollibean (in Berjaya Times Square and Sunway Pyramid) and Brunei for Starbucks Coffee (80%-owned) in 2HFY14.

- BFood intends to franchise Jollibean Malaysia after opening six company-owned outlets.

- Meanwhile, BFood is expected to increase the outlet count of Starbucks in Brunei to 10 within five years. If it successfully takes off, Starbucks Brunei will enhance future earnings outlook; two new outlets are expected to open in the next three months. We expect the seven new malls and five refurbished malls coming up in Malaysia by year-end to underpin Starbucks Malaysia’s exponential expansion.

- BFood’s exposure in the Indonesia market via Kenny Rogers Roaster is primed as the major earnings kicker. Turnaround of operations is anticipated to materialise in FY15F.

- BFood shares have succumbed to selling pressure, falling by 28% from its 52-week high of RM1.88/share last July. This is largely due to the overall weak sentiment for consumer stocks in light of the potential slowdown in consumer spending and its status as a non-syariah compliance stock. We recommend investor to accumulate BFood for its solid execution and resilient business.

- Results are tentatively scheduled for release on 7 March. We expect a seasonal strong 3QFY14 results given the year-end festive seasons and school holidays.

- Valuation wise, FY15F fully-diluted PE of 16x is justifiable given BFood’s earnings track record, intangible value, strong balance sheet and brand name.

Source: AmeSecurities