Stock Name: KFC
Company Name: KFC HOLDINGS (M) BHD
Research House: RHB

KFC Holdings (M) Bhd
(Dec 14, RM3.81)
Upgrade to market perform at RM3.76 with fair value of RM3.85: KFCH announced that it is acquiring 100% of Kernel Foods Pte Ltd, via its subsidiary Pune Chicken Restaurants, by way of acquiring the total equity interest of the latter for RM84,000 and subscribing to an additional RM2.4 million worth of shares.

We understand that Kernel Foods has two KFC restaurants in Pune, India, where KFCH is currently running one of its stores in Deccan Mall. After the completion, KFCH will have three stores in Pune in total. Due to the higher number of stores in the city, KFCH will be able to enjoy more competitive rates from suppliers in terms of supply logistics, which would improve the overall profitability of its stores in India. While we consider this to be a positive move, we prefer to keep our profit margin forecasts for India unchanged for now, until we see some positive synergies coming through.

We believe the total purchase price of RM2.5 million is fair. Based on our previous discussions with management, it usually costs approximately RM1 million to RM1.2 million in set-up costs for KFCH to open a store in India. Furthermore, the direct purchase of the stores reduces the execution risk which is usually associated with opening a new 'greenfield' store. Recall that we previously highlighted that KFCH had some hiccups in opening new stores due to various construction and red-tape issues.

With the completion of the acquisition, KFCH will effectively have seven stores in total in the state of Maharashtra (currently five), which is the only state it is allowed to operate in currently. We consider this purchase as a new store opening, thus the total of seven store openings in FY10 is in line with our assumptions.

we make no change to our forecasts. Risks include: (i) bird/swine flu escalation; (ii) escalation of corn and soyabean prices, which would eat into margins; and (iii) deteriorating consumer spending power, resulting in lower same-store sales (SSS) growth.

We are maintaining our fair value for KFCH at RM3.85, based on unchanged 17 times target FY11 PER. We are, however, upgrading our call on the stock to 'market perform' (from 'underperform' previously) as we believe the downside risk from its current share price is minimal. ' RHB Research Institute, Dec 14


This article appeared in The Edge Financial Daily, December 15, 2010.