- We reaffirm our HOLD recommendation on Berjaya Food (BFood) with an unchanged fair value of RM3.05/share, pegged to a PE multiple of 25x CY15F earnings.

- Stripping out the exceptional item relating to the recognition of gain arising from the re-measurement of 50% equity interest in Berjaya Starbucks (BStarbucks) in accordance with the requirements of the accounting standard, BFood reported core net profit of RM5mil for its 2QFY15, bringing 1HFY15 core earnings to RM11mil.

- A first interim dividend of 2.5sen was declared.

- While BFood’s 1HFY15 result accounts for only 32% of both our and consensus estimates, we are keeping our EPS estimates unchanged.

- A stronger 2H is expected as it will be boosted by the earnings accretion from the full consolidation of BStarbucks. 2Q reflected only 1.5 months of BStarbucks’ consolidation and is also a seasonally weak quarter. The acquisition of BStarbucks was completed on 18 September 2014.

- Notwithstanding the accretive acquisition of BStarbucks, the marginal lower earnings QoQ were dragged by higher finance costs of RM2.1mil undertaken for the acquisition.

- That said, finance cost is expected to moderate in the coming quarter following the partial repayment of RM57mil in October. BFood will repay another part of its debts in mid-December. Net gearing stood at 0.6x as at end-1HFY15.

- Indonesia continues to be in the red and is expected to break even in FY17F.

- Moving into 3Q, sales momentum is expected to pick up, backed by festivities. Expansion of Starbucks remains solid with nine new outlets in the pipeline for FY15F, underpinned by its solid brand name and growing franchise value.

- During the quarter, BFood opened:- KRR Malaysia (+3); KRR Indonesia (+1), Starbucks Malaysia (+3) and Starbucks Brunei (+1). This brought its total outlets to 340 as at end-1HFY15. By end-FY15, BFood is expected to have a total of 360 outlets under its portfolio of brands.

- While we like the resilient earnings trajectory of BFood, valuation is high at 28x PE – at the higher end of its PE band.

Source: AmeSecurities