FY18 core net profit of RM16.5m (+44.5% YoY) came in below ours and consensus expectation, accounting for 70% and 74% of ours and consensus full year forecast respectively mainly due to higher than expected effective tax rate as a result of losses from KRR Malaysia. We cut our FY19-20 earnings forecast as we adjust for higher effective tax rate going forward. We maintain BUY with a lower TP of RM1.98 based on 25X P/E multiple pegged to FY19 EPS.

Below expectations. FY18 core net profit of RM16.5m (+44.5% YoY) came in below ours and consensus expectation, accounting for 70% and 74% of ours and consensus full year forecast respectively. The results disappointment was due to higher-than expected tax rate (55% vs expected 45%) and heavier than expected losses from KRR Malaysia.

Dividends. Declared DPS of 1 sen (4QFY17: 1 sen) going ex on 10/07/18 and payable on 12/07/18.

QoQ. 4QFY18 core net profit plunged by 83.7%. This was mainly due to (i) the loss before tax of RM 4.2m recorded by KRR Malaysia, (ii) the seasonally stronger 3QFY18 (holiday seasons) and (iii) higher effective tax rate.

YoY. 4QFY18 turned profitable to RM0.8m from a core loss of RM3.4m in 4QFY17. This was mainly due to higher sales from Starbucks Malaysia (+1.8% SSSG and opening of new cafes) as well as the absence of losses from KRR Indonesia that was disposed of in 3QFY18.

YTD. FY18 core net profit rose by 44.5% from RM11.4m to RM16.5m due to higher sales from Starbucks Malaysia (positive SSSG and opening of new cafes) and lower losses incurred by KRR operations in Indonesia arising from further closure of non performing outlets.

Outlook: BFood will continue growing its top line by expanding 25-30 new Starbucks outlets annually. We expect Starbucks’ top line to grow significantly, buoyed by the absence of sales tax between June and September. Bfood will continue its efforts to turnaround KRR Malaysia (which recorded RM4.2m in losses before tax in 4QFY18) with low priced menu options and the opening of five new KRR Malaysia restaurants this year.

Forecast. We cut our FY19-20 earnings forecast by 6%-9% as we adjust for a higher effective tax rate.

Maintain BUY, with a lower TP: RM1.98 (previously: RM2.12). Our TP is derived from an earnings multiple of 25x FY19 EPS of 7.9 sen. Despite the continued losses at KRR Malaysia, we believe that BFood is a good proxy to higher discretionary spending via Starbucks, fuelled by the GST abolishment (and 3 month “tax holiday”)

Source: Hong Leong Investment Bank Research - 22 Jun 2018