- We are downgrading Berjaya Food (BFood) from BUY to HOLD, with a higher fair value of RM3.05/share (vs. RM2.50/share previously), pegged to a higher PE multiple of 25x fully-diluted CY15F earnings – a justified premium over its peers, following earnings accretion of Berjaya Starbucks Coffee Sdn Bhd (BStarbucks).

- We have raised our earnings by 7%-8% over FY15F-FY17F to reflect stronger same-store-sales growth (SSSG) of 12% compared to our previous conservative SSSG assumption of 10%. BStarbucks achieved 16% SSSG in FY14.

- We expect earnings to increase phenomenally by 50% in FY15F due to an enlarged earnings base following five months of equity accounting (50% stake) and seven months of contribution from fully-consolidated BStarbucks (100% stake).

- While its valuation is high based on an FY15F PE of 31x, FY16F will reflect a full year contribution from the fully-consolidation BStarbucks, its high growth segment. Acquisition of the remaining 50% equity interest in BStarbucks is on track to complete by this month.

- Notwithstanding our downgrade recommendation, we remain positive on BFood’s high growth earnings trajectory in the medium-to-longer term, following its steep share price increase. Expansion continues to be on a solid footing underpinned by its solid brand name and growing franchise value.

- Notably, post acquisition, Starbucks will be the key revenue driver, contributing 71% of revenue on a fully consolidated basis. Given Starbucks’ underlying strong franchise value, we see expansion potential in untapped outskirt areas.

- It is interesting to note that BStarbucks’ outlet expansion will still be subject to the master franchisor’s approval.

- A key wildcard would be fast-moving consumer goods for Starbucks; we believe that this would materialise in the near-to-medium term, with potential acquisitions in the F&B space.

- The key risk to our earnings projections are:- (1) expectations of a slowdown in consumption spend; (2) strengthening of US dollar; and (2) higher food costs.

- The group’s 1QFY15 results are due for release on 15 September.

- At the current levels, the stock is trading at a forward PE of 31x, which is at the higher end of its PE band.

Source: AmeSecurities