Results

• 9M17 net profit of RM13.7m came in below expectations, accounting for only 58.8% and 53.6% of our and consensus forecasts respectively.

Deviations

• Larger-than-expected losses at KRR Indonesian operations

Dividend

• Declared interim dividend of 1.0 sen.

Highlights

• YoY: Revenue rose 11% yoy mainly due to opening of more Starbucks outlets in Malaysia. However, this was not reflected in the net income level, which fell 40% to RM4.5m mainly due to poorer performance in overseas operations.

• QoQ: Revenue was up 9.7% qoq due to opening of new Starbucks Malaysia outlets despite -1% SSSG qoq. Net profit was flat at RM4.5m. This was due to poorer performance in KRR Indonesia operations, which incurred heavier losses despite better performances from KRR Malaysia operations which recorded 8% SSSG qoq. Heavier losses from KRR Indonesia operations resulted in higher effective tax rate as tax relief from losses incurred overseas are not allowed to be offset back in Malaysia.

• YTD: Net profit fell 31% due to heavier losses in overseas operations, and higher finance costs (arising from higher borrowings). YTD the group reported negative SSSG in all business operations except Starbucks Malaysia, which was flat.

• Outlook: We expect BFood to continue to grow its top-line as it continues to open Starbucks outlets. However, with the prevailing weak ringgit and rising commodity prices, we expect the group to continue facing margin pressure in its Starbucks operations. Despite this, Starbucks price hike in January 2017 is expected to somewhat mitigate the negative impact.

Risks

• Persistent low consumer sentiment, prevailing weak ringgit and rising commodity prices.

Forecasts

• We lower our FY17-19 net profit forecasts by 20%, 26%, and 27% respectively, largely to reflect: 1) Higher raw material cost 2) Higher loss assumption at KRR Indonesia and 3) Higher effective tax rate as a result of higher loss assumption at overseas operations that can to be offset back home.

Rating

Under Review

• Short-term prospects do not look promising for the group. However, a firmer ringgit and turnaround in KRR Indonesian and Malaysian operations could spell a rerating for the group as top-line is growing as expected.

Valuation

• We are reviewing our valuation methodology as we opine that a blanket P/E multiple on BFood is no longer suitable given the continuous drag from loss making businesses despite resilient Starbucks performance. Our previous TP of RM1.55 was based on a P/E multiple of 20.5x pegged to previous forecast of FY18 EPS.

Source: Hong Leong Investment Bank Research - 16 Mar 2017