We are encouraged by the promising performance of KRR Malaysia’s operations which broke even in 3QFY19 (vs losses of RM6.7m in FY18). The introduction of KRR Express (centred around OMG Fried Chicken) is expected to grow store count by up to 10 stores in FY20. Bfood will continue to grow Starbucks, with a targeted 30 new outlets in FY20. Of the 30 new outlets, 13 are expected to be drive thrus and 2 are expected to be Starbucks reserve outlets. As the meeting yielded no surprises, we keep our forecasts unchanged. Our BUY call and TP of RM2.05 pegged to an unchanged 25x PE on CY19 EPS remains unchanged.

KRR Malaysia turnaround story. We are encouraged by the promising performance of KRR Malaysia’s operations which broke even in 3QFY19 (vs losses of RM6.7m in FY18). Despite this, we note that 3Q is typically the strongest quarter for F&B due to festive season, boosting sales volumes. We expect KRR Malaysia to return to profitability in FY20 led by the closing of unprofitable stores as well as opening of KRR Express concept stores.

KRR Express concept. We are positive on Bfood’s introduction of the KRR Express grab and go concept, which has minimal seating area and therefore, less rental requirements. The concept is centred around its OMG Fried Chicken, which is a fried chicken menu option fried with a low amount of oil. Currently there are 3 KRR Express outlets (in Plaza Shah Alam, Rawang R&R and Johor Premium Outlet), with plans to open up to 10 more in FY20. We reckon that Bfood are using the KRR Express venture to field test the popularity of the OMG Fried Chicken amongst consumers with the possibility of introducing the menu item to regular KRR restaurants.

Starbucks expansion plans. Bfood will continue to grow Starbucks, with a targeted 30 new outlets in FY20. Of the 30 new outlets, 13 are expected to be drive thrus and 2 are expected to be Starbucks reserve outlets. Note that drive thrus have slightly better margins, with shorter payback periods of between 2.5 to 3 years (as opposed to 3 to 3.5 years for regular outlets).

High effective tax rate to remain. We expect the group’s high effective tax rate of ~40% to remain for the foreseeable future. We understand that this is due to (i) a large chunk of the group’s interest cost being non tax deductible as the borrowings are held at the holding company level (which was borrowed to fund the acquisition of the remaining 50% stake in Starbucks Malaysia operations) as well as (ii) much of the renovation costs for Starbucks outlets being non tax deductible.

Stronger ringgit positive for Bfood. We note that approximately half of Starbuck’s raw material costs are denominated in USD as Bfood purchases select ingredients (coffee beans, frappucino mix etc.) from Starbucks corporation USA as part of their agreement. YTD, the ringgit has appreciated 1.7% against the greenback.

Forecast. As the meeting yielded no surprises, we keep our forecasts unchanged.

Maintain BUY, TP: RM2.05. We are encouraged by the change in fortunes of KRR Malaysia’s operations. Nevertheless, we expect the combination of positive SSSG and opening of new Starbucks outlets to drive growth for the group. Our BUY call and TP of RM2.05 are unchanged, pegged to 25x PE on CY19 EPS.

Source: Hong Leong Investment Bank Research - 29 Mar 2019