- We reaffirm our HOLD recommendation on Berjaya Food (BFood) with a lower fair value of RM2.75/share (vs. RM2.85/share previously), pegged to a PE multiple of 29x on FY16F earnings as we fine-tuned our SSSG assumptions following the release of its FY15 results.

- We have trimmed our FY16F-FY17F earnings by 2%-6%. We project Starbucks FY16F’s SSSG at +4% (FY15: 0%) and earnings at RM37mil. FY17F earnings are expected to expand to RM43mil and we introduce FY18F earnings at RM48mil. Our estimate reflects full-year consolidation of Starbucks – the growth engine that is estimated to account for about 70% of revenue.

- Excluding the one-off item (RM159mil gain on the remeasurement of its 50% equity interest in Starbucks), BFood reported 4QFY15 core earnings of RM6.4mil, bringing headline FY15 core earnings to RM26mil.

- FY15 numbers were within our expectations, making up 98% of our estimate but 90% of consensus. It also declared a third interim dividend of 2.0sen. Dividends declared for FY15 amount to 5.8sen (2.2% dividend yield).

- Earnings were up 13% YoY on the back of a 155% increase in revenue driven by the full consolidation of Starbucks (acquisition completed on 18 September 2014) and heavy advertising and promotions activities, and festive sales in 4Q. EBIT margins deteriorated by 2ppt QoQ to 10% due to a significant increase in promotional activities undertaken. The company will continue to invest in promotional activities to boost sales volume going forward given the expectation of a moderation in consumer spending post GST.

- Starbucks’ 4Q SSSG showed a marked improvement, at -2% compared to 3Q’s -4.9% and 2Q’s 5.6%. We expect to see a more pronounce SSSG from 2QFY16 onwards as we expect a wider SSSG contraction in 1QFY16 due to a strong base YoY (1QFY15: +12.5%).

- While KRR Malaysia remains profitable, KRR Indonesia is still loss-making. We are comforted by the fact that Indonesia will undergo store rationalisation for stores that cannot be turned around (closure of 1-2 stores p.a.). The company is slowing down Indonesia’s expansion to five new stores p.a. (vs. eight stores p.a. previously).

- Key upside to our earnings forecasts will arise from Starbucks’ FMCG business. This would give a boost to FY17F’s earnings prospect, but we have yet to factor in its contributions from the FMCG business into our earnings model.

- Valuation is fair at the current levels; it is trading at an FY16F PE of 27x, which is above its historical 3-year mean of 16x.

Source: AmeSecurities Research - 16 Jun 2015