Results

• In-line – 1Q18 core net profit of RM5.3m (+6.7% yoy) was in-line with our expectations, accounting for 25.4% of our full-year forecasts. Against consensus, the results disappointed, accounting for only 20.5% of consensus full year estimates.

Dividend

• Declared DPS of 1 sen (ex-date: 11/10/17), payable on 27/10/17.

Highlights

• Yoy: 1QFY18 core net profit rose 6.7% to RM5.3m (from RM5m a year ago) mainly due to: 1) the opening of 3 new additional Starbucks cafes in 1Q18 and 2) positive same store sales growth of 2.2% (arising from a price hike since Jan-2017), which have in turn resulted in higher contribution from Starbucks Malaysia operations.

• QoQ: 1QFY18 core net profit more than quadrupled to RM5.3m (from RM1.1m in 4QFY17) due to the absence of Employee Share Scheme that was exercised in 4Q17 (amounted to RM1.8m) and improved performance from KRR Malaysia operations (following the closure of 2 loss making stores during 1QFY18).

• Outlook: BFood will continue growing its top-line (via the expansion of circa 25 new Starbucks outlets p.a.). Recent strengthening of MYR should have a healthy effect on Starbucks Malaysia’s margins going forward as approximately 40% of Starbucks COGS (Coffee beans, frappuccino mix, packaging materials etc.) are denominated in US$ as part of BFood’s agreement with Starbucks Corp (USA). Despite a portion of KRR Malaysia restaurants remaining marginally loss making, the group expects to turn KRR Malaysia around with promotions offering affordable prices as well as cost cutting measures. BFood also plans to open five new KRR Malaysia restaurants this year.

Risks

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

Forecasts

• Unchanged.

Rating

• HOLD; TP: 1.55

• Recent strengthening of the ringgit should bode well for the group going forward as 40% of Starbucks Malaysia’s COGS are denominated in USD. Despite this, additional debt used to fund café openings will incur heavier finance costs to the group going forward (Net Debt: Currently: RM240.2m vs RM191.3m at end-FY17.

Valuation

• We maintain our HOLD call, with a lower SOP-derived TP of RM1.55 (from RM1.73 previously) after incorporating higher net debt.

Source: Hong Leong Investment Bank Research - 18 Sept 2017