Highlights

• Resilient same store sales growth (SSSG) for Starbucks. Despite a weak consumer sentiment, Starbucks recorded a strong SSSG yoy of 5%. A gradual recovery in consumer spending in 2H16 should see a pick-up in SSSG growth. Starbucks is expected to account for 78% of FY17 revenue.

• Huge growth potential. Starbucks plans to open 25 stores annually until 2019. Currently, Starbucks has a low outlet penetration ratio (no. of outlets per million population) at 6.7 compared to Singapore (21.2) and America (39.3), pointing room for growth in Malaysia. Each outlet is expected to generate approximately RM2m in annual revenue.

• Premier Coffee brand. Starbucks status as the premier coffee chain (43% market share) allows it to pick and choose the most profitable locations for new store openings over its competitors.

• Impending FMCG business. BFood has secured the rights to sell ready to drink beverages in Malaysia. Sales are expected to commence by October 2016.

• Continued drag from KRR and Jollibean. Despite strong show by Starbucks, KKR and Jollibean continued to drag on overall profitability. SSSG for KRR Malaysia and Indonesia operations were -18% and -17% yoy respectively for FY16.

• Closing unprofitable KRR and Jollibean outlets. Management is determined to close unprofitable outlets as KRR Indonesia and Jollibean remain loss-making putting a dampener on earnings.

• Persistent high effective tax rate Loss making operations overseas could not be offset resulting in a high effective tax rate expected to persist until closure of unprofitable overseas operations (FY16 effective tax rate was approximately 45%).

Risks

• Persistent low consumer sentiment

• Nandos superior brand name to KRR threatens to take away more market share from a business unit that is already experiencing negative SSSG.

Forecasts

• 3-year revenue CAGR of 11.1%. 3-year net income CAGR of 14.5% (FY17: RM27.9m, FY18: RM30.5m, FY19: RM34.2m).

Rating

• Initiate with HOLD, TP: RM1.86 (1.6% Upside)
• BFood has growth potential due to its strong brand name in Starbucks driving sales, aggressive store expansion, ability to choose the most profitable locations for new stores, injection of FMCG business unit, reinforced by an expected recovery in consumer spending. Rerating catalyst will emerge if measures to reduce drag from KKR and Jollibean come into fruition.

Valuation

Initiate with a HOLD with a TP of RM1.86 based on a P/E multiple of 25x tagged to FY17 EPS.

Source: Hong Leong Investment Bank Research - 14 Jun 2016