Highlights

• Bfood looking to dispose of loss making Jollibean and KRR Indonesia operations in FY18. Jollibean and KRR operations recorded a loss before tax of RM2.9m and RM9.0m in FY17 (up from RM2.4m and RM7.0m losses from the year before). The disposal of these two entities should result in a significantly lower effective tax rate for the group going forward. Note that the group recorded a 75% effective tax rate in FY17 as overseas losses from these two businesses could not be offset at the parent company level.

• Low price menu options to turn around KRR Malaysia. KRR Malaysia operations recorded a RM4.2m loss before tax in FY17 down from a pre-tax profit of RM2.5m in FY16 mainly from increased competition and weak consumer sentiment. The group plan to turn around KRR Malaysia by offering lower cost options (cheapest meal option now for a quarter chicken meal is RM13.90 vs RM17.90 at its rival Nandos). The group currently have 82 outlets in Malaysia and plan to open five more in FY18. The group expect KRR Malaysia to be profitable this year.
• Starbucks Malaysia 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). Encouragingly, BFood reported only a marginal decline in sales volume despite having raised its prices significantly in early-2017.

Risks

• Persistent weak consumer sentiment, ringgit weakening, competition to KRR Malaysia operations from Nandos, KFC and Texas Chicken.

Forecasts

• Unchanged.

Rating

HOLD; TP: 1.55 ↔

• Recent strengthening of the ringgit will bode well for the group going forward as 40% of Starbucks Malaysia’s COGS are denominated in USD. Despite this, increasing loss making business units continue to stymie the group’s growth.

Valuation

• We maintain our HOLD call and TP of RM1.55 based on a SOP valuation. A potential disposal of the group’s Jollibean and KRR Indonesia operations would spark a rerating.

Source: Hong Leong Investment Bank Research - 17 Oct 2017