- We reaffirm our BUY recommendation on Berjaya Food (BFood) with a lower fair value of RM2.00/share (vs. RM2.30/share previously), based on our DCF valuation, following the weaker-than-expected 3Q results.

- Net profit rose by a robust 26% YoY for 9MFY14, driven by increased sales of 29% YoY. No dividends were declared during the quarter.

- While stronger net profit and sales were achieved on YoY and QoQ basis, 9M results constituted 67% of our full-year projections of RM26mil, which is below our expectation.

- 3Q sales were affected by:- (1) flood situation in Kuantan that affected three Kenny Rogers Roaster (KRR) outlets; (2) closure of Genting Outdoor Theme Park (where top 3 best performing outlets were located) for three years to make way for Twentieth Century Fox World; (3) temporary closure of Ipoh Parade Mall; (4) softer consumer spending in 3Q due to the rising cost of living in Malaysia; and (5) slowerthan-expected sales for Jollibean Singapore due to manpower shortages.

- Having said that, 3Q sales outperformed 1Q’s and 2Q’s given the traditionally strong quarter. 9MFY14 SSSG were - 2% for KRR Malaysia, +5% for KRR Indonesia, and +13% for Starbucks Malaysia.

- EBIT margin shrank to 7% vs. 9MFY13’s 11% in view of rising cost pressures. The group plans to reshuffle its menu and raise prices for KRR for Malaysia and Indonesia. Average ticket size for KRR Malaysia currently stands at RM55 vs. RM40 in FY13.

- Our EPS forecast have been trimmed by 13% to reflect flat SSSG for KRR Malaysia and Jollibean Singapore. We forecast FY14F earnings to grow by a robust 22% to RM23mil.

- Nevertheless, Starbucks’ exponential expansion and robust consumption demand are expected to remain strong.

Prospects of Starbucks’ foray into Brunei in February look promising. We expect minimal contribution in FY14.

- On the expansion front, BFood is expected to open 4 outlets for KRR Malaysia, 2 for KRR Indonesia, 11 for Starbucks Malaysia, and 2 for Jollibean Singapore by end-FY14. This would bring the total to 336 outlets or +23% by end-FY14. Positively, expansion of KRR into Cambodia is confirmed with its maiden entry in June with the opening of AEON mall.

- FY15F’s fully-diluted PE of 18x is justifiable, in light of BFood’s strong franchise value, healthy balance sheet and regional expansion.

Source: AmeSecurities