Highlights

• To recap, BFood’s 9MFY17 net profit fell 31% to RM13.7m, as resilient performance from Starbucks was more than offset by losses incurred by KRR operation in Malaysia and higher write down of fixed assets (arising from closure of certain non performing restaurants).

• Decent performance at Starbucks Malaysia to sustain. We believe performance from Starbucks Malaysia will remain relatively resilient as the bread and butter of BFood, as higher cost of raw materials (from rising commodity prices and persistently weak MYR) will be mitigated by price hikes since Jan-17 and the group’s continuous efforts to expand the presence of Starbucks (by >25 cafes p.a.).

• KRR losses to narrow. As for KRR, we believe losses at KRR operations will likely narrow, as persistently weak consumer sentiment in Malaysia will be partly mitigated by management’s conscious efforts to close down unprofitable stores in Indonesia (which has reduced from 23 restaurants as at end-FY16 to 17 restaurants in end-3QFY17).

• Change in valuation methodology as a blanket P/E valuation is no longer suitable. Given our expectation that KRR operations will continue to drag BFood’s earnings going forward (despite resilient performance at Starbucks),we believe a blanket P/E multiple on BFood is no longer suitable. We are changing our valuation methodology for BFood from a blanket target P/E multiple of 20.5x to sum-of-parts valuation, which better reflects the businesses of BFood.

Risks

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

Forecasts

• Maintained, as we believe the recent downward adjustment in our FY17-19 net profit forecasts (on 16 Mar 2017) has already reflected the less-than-promising near-term earnings outlook.

Rating

HOLD ↔ ; TP: RM1.68

• Short-term prospects do not look promising for the group. Current weak ringgit levels and rising commodity costs are expected to cause margin pressure going forward. However, consumer sentiment rally, 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

• As highlighted above, we change our valuation methodology from P/E to sum-of-parts (which values Starbucks Malaysia at 20.5x FY18 earnings, and 1x P/B for the remaining businesses). Pursuant to the change in valuation methodology, our new TP on Bfood is raised by 8.4% to RM1.68 (see Figure 1). Maintain HOLD recommendation on the stock as we believe further upside is capped by its rich valuation (at current share price, BFood is trading at FY18 P/E of 31.4x)

Source: Hong Leong Investment Bank Research - 20 Mar 2017