- We reaffirm our HOLD recommendation on Berjaya Food (BFood) with a lower fair value of RM2.85/share (vs. RM3.05/share previously), pegged to a PE multiple of 25x FY16F earnings, following the weak reported 9MFY15 numbers.

- We have trimmed our FY15F-FY17F earnings estimates to account for a slower-than-expected SSSG for Starbucks. We now project FY15F earnings at RM26.5mil.

- 9MFY15 earnings were below our and consensus estimates, accounting for 57%-% of full-year estimates, despite a seasonal strong 3Q underpinned by festivities and full consolidation of Starbucks.

- BFood reported a core net profit of RM8.6mil for its 3QFY15, which brought 9MFY15 core earnings to RM19.6mil (excluding RM159mil from the gain on the re-measurement of its 50% equity interest in Berjaya Starbucks). A second interim single-tier dividend of 1.25sen was declared, bringing total dividend declared to-date to 3.8sen.

- Management guided that Starbucks’ SSSG will come in at a slow single-digit level for FY15 (9MFY15 SSSG: -0.3%) vs. the double-digit growth historically given the slowing domestic consumption. KRR Indonesia will continue to be in the red and is expected to break-even in the next 2-3 years.

- Store expansion remains solid. The company opened 16 new stores for the FY to-date – KRR Malaysia (+2), Starbucks Malaysia (+11), Starbucks Brunei (+1) and Jollibean Singapore (+2).

- We see minimal impact from the strengthening of USD despite having more than 30% of food cost imported from United States. This is negated by the savings from dairy products (~5% savings).

- Key upside to our earnings is the fast moving consumer goods (FMCG) for Starbucks. Management is set to roll-out Starbucks’ FMCG products by end-2015 in Malaysia. BFood will import Starbucks’ canned and bottled ready-to-drink coffee from Korea and engage a third-party distributor.

- We are uncertain over the response of Starbucks’ ready-to-drink coffee given the competitive pricing. Nonetheless, we think prices would be at least RM10 per bottle due to its premium brand. We are yet to input contributions from Starbucks’ FMCG into our earnings estimates.

- At the current level, the stock is trading at 25x PE on FY16F, at the higher end of its PE band.

Source: AmeSecurities