Highlights

• Bfood have entered into an agreement to dispose its 99.9% stake in Kenny Rogers Roasters (Indonesia) for a nominal cash consideration or RM0.32 and a settlement of RM3.1m in debt owed by Kenny Rogers Indonesia to Bfood.

Comments

• We are positive on this disposal despite the low fee as Bfood had been struggling to turn around KRR Indonesia (recall, the unit posted a loss before tax of RM9m in FY17). Ceteris paribus , the absence of losses from KRR Indonesia will boost Bfood’s bottomline in FY17 by 14% to RM20.9m.
• BFood outlook: -Starbucks: 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, Starbucks reported only a marginal decline in sales volume despite having raised its prices significantly in early-2017.
• -Jollibean: Bfood will continue to look to dispose of its Jollibean business unit which recorded loss before tax of RM2.9m.

Risks

• Persistent weak consumer sentiment, ringgit weakening, competition to KRR Malaysia operations from Nandos, KFC and Texas Chicken, failure to dispose of Jollibean

Forecasts

• We raise our FY18/19/20 forecasts by 14%/30%/31% to account for the absence of losses from KRR Indonesia going forward.

Rating

HOLD; TP: 1.62

• Recent strengthening of the ringgit will bode well for the group going forward as 40% of Starbucks Malaysia’s COGS are denominated in USD.

Valuation

• In light of this disposal, we change our valuation methodology from SOP to PE multiple. We maintain our HOLD call with a higher TP of RM1.62 (from RM1.55) based on a PEx of 21 (in line with regional peers). Potential disposal of Jollibean would once again spark a rerating for the group.

Source: Hong Leong Investment Bank Research - 27 Nov 2017