Results

• Below Expectations – FY17 core net profit of RM16.5m came in below expectations, missing consensus and our estimates by 14-24%.

Deviations

• Larger-than-expected losses from Indonesian and Malaysian KRR operations.

Dividend

• Declared DPS of 1 sen, bringing total DPS for the full year to 2.5 sen, which was within our expectation.

Highlights

• QoQ: Core net profit fell by 76.4% to RM1.1m due to seasonality, heavier losses from KRR Malaysia operations, -19% qoq SSSG in Brunei Starbucks operations and Employee Share Scheme being exercised (which led to an additional RM1.8m operational expense).

• YoY: Core net profit dropped -66.4% from heavier losses in KRR Malaysia operations, and weaker ringgit (which affected GP margin of Starbucks Malaysia operations)

• YTD: Net profit fell 22.7% mainly due to weaker MYR (USD/MYR average of 4.20 in FY17 vs 4.04 in FY16) as approximately 40% of Starbuck’s COGS is denominated in USD as part of the group’s agreement with Starbucks Corp (USA) as well as higher finance costs (arising from higher borrowings).

• Outlook: While BFood will continue growing its top-line (via the expansion of circa 25 new Starbucks outlets p.a.), we expect the top line growth and price hike (since Jan-17) will be offset by margin compression arising from prevailing weak MYR.

Risks

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

Forecasts

• We cut our FY18 & FY19 core net profit forecasts by 7% and 10% to account for slower-than-expected turnaround in Malaysian KRR operations.

Rating

• HOLD; TP: 1.73

• Short-term prospects do not look promising for the group. However, the group continues to close loss-making KRR Malaysia and KRR Indonesia outlets (11 and 7 respectively in FY17) which bode well for the future. A firmer ringgit and quicker turnaround in KRR Indonesian and Malaysian operations could spell a rerating for the group as top-line is growing as expected (FY17 revenue made up 100.3% of our expectations).

Valuation

• We maintain our HOLD call. Despite lowering our FY18-19 core net profit forecasts, we raise our SOP-derived TP higher (by 2.3%) from RM1.68 to RM1.73 , as we roll-forward our valuation base year from FY18 to FY19 (see Figure 4)

Source: Hong Leong Investment Bank Research - 15 Jun 2017