We met with Berjaya Food and came away feeling positive about the group’s prospects. Bfood expect to open between 25-30 Starbucks outlets in FY19 with a higher proportion of drive thrus as they enjoy higher EBIT margin due to the lower rental cost. We expect Bfood’s effective tax rate to remain high due to (1) unprofitability of KRR Malaysia; and (2) interest cost at the parent company level not permitted to be tax deductible. Forecasts unchanged. We maintain our TP of RM1.98 and BUY call.

We met with Berjaya Food and came away from the meeting feeling positive about the group’s prospects going forward.

More Starbucks store openings. Starbucks is expected to continue their long term plan of opening 25-30 stores per annum. However, Starbucks plans to open a higher portion of drive thru stores in FY19 than in the past, with 13 stores in FY19. Based on our estimates, drive thru stores rental cost per square feet is significantly lower than shopping malls, resulting in higher EBIT margin for drive thru outlets. Currently, there are 37 drive thru Starbucks outlets in Malaysia, out of 260 total Starbucks outlets.

Petronas expects to add 50 Starbucks kiosks within a year. As part of Bfood’s partnership with Petronas, the group plan to open 50 Starbucks kiosks at Petronas petrol stations (Figure 1). We are positive on this asset light business venture as we estimate the capex requirements for kiosks to be under a third of the cost of a regular outlet.

Kenny Rogers Roasters Malaysia. Bfood is in the process of revamping their menu offerings to include menu options that suit local taste such as Kenny’s Nasi Lemak OMG. The group expects to open six new KRR outlets in FY19. We expect KRR Malaysia to narrow their losses in FY19, note that KRR Malaysia recorded a loss before tax of RM4.2m in 4QFY18.

Effective tax rate to remain high. We expect Bfood’s effective tax rate to remain high due to (1) unprofitability of KRR Malaysia; and (2) interest cost at the parent company unable to be offset. Going forward, we forecast effective tax rate to average 45% in FY19.

Minimum wage hike not expected to have an impact. Bfood guided that they do not expect see be significantly impacted by a potential hike in minimum wage as all their employees are already making at least RM100/200 above the current minimum wage level.

Outlook: We are optimistic on Bfood’s prospects going forward due (1) to sales tax holiday between June and September (which should result in increased sales); (2) lower realised lower raw material cost in FY19 thus far (Figure 2); (3) absence of losses from disposed KRR Indonesia operations; (4) expected better performance from KRR Malaysia; and (5) improving consumer sentiment.

Forecast. Unchanged.

Maintain BUY, TP: RM1.98. 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.

Source: Hong Leong Investment Bank Research - 10 Aug 2018