• BFood’s stock traded ex-bonus (1-for-4 bonus) today; we reflect this in our core EPS and DPS forecasts, as well as TP of RM0.91 (18x CY23F P/E).
• Despite its store expansion plan, we project a yoy decline in FY23F earnings as pent-up demand wanes and weaker consumer spending.
• We believe BFood’s valuations have priced in the weaker prospects.

1-for-4 bonus issue goes ex today

Berjaya Food Berhad’s (BFood) share price traded ex-bonus (1-for-4 bonus issue) today, enlarging its share base by 1.5bn to 1.9bn. The exercise was mainly undertaken to reward its shareholders and broaden its shareholder base. While this will not have any fundamental impact on the company, we are slightly positive on it as it should help to enhance the stock’s liquidity and near-term sentiment.

Targeting a higher number of Starbucks store openings in FY23F

As at end-FY6/22, BFood has a total of 356 Starbucks Malaysia (BStarbucks) stores (76.4% of BFood’s total store count; 85-88% of total revenue). Of these, c.21.0% are drive-through concept outlets (we estimate that the drive-through stores currently account for c.30% of total BStarbucks’ sales in FY22). BFood targets to increase the proportion of drive-through outlets to c.30-40% of total BStarbucks outlets in the next 2-3 years. This is a positive development as the drive-through format typically carries a higher average transaction size, which should be a boon to margins, in our view. After a net new 29 BStarbucks openings in FY6/22, we gather that BFood aims to open more than 30 stores in FY23F (previously guided 25-30 p.a.) in the urban and sub-urban areas, further expanding its store network across Malaysia, particularly in high footfall and traffic areas.

Streamlining its Kenny Rogers Roasters (KRR) operations

We gather that BFood’s KRR turned profitable in FY22, with an EBIT of c.RM8.0m, after several years of being loss-making. We attribute this to BFood’s efforts to close most of its non-performing outlets in the past two years (leading to higher profitability), continuous menu improvements (introduction of fish fillet, fried chicken, etc) and store enhancements (better interior design and relocation to higher footfall areas). Moving forward, we expect
KRR to remain profitable in FY23F.

Expecting lower hoh sales demand in 2HCY22F

Nonetheless, we are expecting a weaker earnings outlook for BFood in FY6/23F on margin contraction, as we expect its transaction sizes to decline as pent-up demand wanes. This is in addition to higher input cost pressure (e.g. chicken, milk, coffee, creamer and sugar) owing to elevated commodity prices and higher operating expenses (due to minimum wage hike) to weigh on margins. Weaker discretionary spending in 2HCY22F could dampen BFood’s sales demand amid high inflation, in our view.

Reiterate Hold, with an ex-bonus TP of RM0.91 (18x CY23F P/E)

We retain our Hold call on BFood with an ex-bonus TP of RM0.91 (18x CY23F P/E, in line with its historical 5-year mean P/E). We expect a weaker operating environment ahead in 2HCY22F, but we also believe BFood’s weaker earnings prospects have been largely priced in as the stock is currently trading at 17.6x CY23F P/E, a mere 2% discount to its 5-year mean P/E. We expect BFood’s share price to be supported by its extensive retail presence with c.466 total outlets in Malaysia as of end-FY22.

Upside and downside risks

Upside risks: i) stronger-than-expected SSSG across BStarbucks and KRR operations, and ii) higher-than-expected margin expansion. Downside risks: i) reimposition of lockdown measures following newer variants of Covid-19, ii) sharp increase in operational costs and raw material prices, and iii) weaker-than-expected consumer spending on rising inflationary pressure, which could lead to lower sales demand for BFood’s products.

Source: CGS-CIMB Research - 2 Sep 2022