12MFY19 core PATAMI of RM26.3m (+58.9% YoY) was below expectations, accounting for just 88.3% and 90.1% of ours and consensus 12M forecasts, respectively. The poorer-than-expected results were due to EBIT losses from KRR Malaysia. We lower our FY19/20/21 forecasts by 1.3%/2.9%/4.0% to account for slower-than-expected turnaround in KRR Malaysia. After our earnings adjustment and rolling over our valuation year, our TP drops to RM2.00 pegged to an unchanged 25x of FY20 EPS of 8.0 sen.

Below expectations. 12MFY19 core PATAMI of RM26.3m (+58.9 YoY) was below expectations, accounting for just 88.3% and 90.1% of our and consensus 12MFY19 forecasts, respectively. The poorer-than-expected results were due to EBIT losses (i.e. LBIT) from KRR Malaysia of RM2.6m. Note that Bfood recently announced the change in its FYE from Apr to June. As such, there will be a 5Q results of 2 months (i.e. May and June) that will be announced for FY19 (14M FYE).

Dividends. Declared DPS of 1 sen (4QFY18: 1 sen) going ex on 10 Jul 2019, taking YTD dividend to 4 sen (12MFY18: 4 sen) per share.

QoQ. Revenue declined of 5.9% and higher effective tax rate resulted in core PATAMI declining 54.9%. Note that 3Q is typically the strongest quarter, as festive period, heightened tourist arrivals and school holidays often result in robust sales numbers. As such, although lower sales in 4Q were expected, the magnitude of its QoQ earnings decline was a negative surprise due to KKR Malaysia reverting to red.

YoY. Sales grew to RM169.9m (+6.2%) driven by opening of additional Starbucks outlets as well as positive same-store-sales (SSSG) in both Starbucks (+1.0%) and KRR Malaysia (+1.4%) operations. Meanwhile, bottom line more than quadrupled as KRR Malaysia posted narrower EBIT losses of RM2.6m (vs. EBIT loss of RM4.2m in 4QFY18).

YTD. Revenue growth of 6.1% was predominantly due to opening of additional Starbucks outlets and SSSG of +4.0%. Core PATAMI swelled 58.9% to RM26.3m due the higher sales from Starbucks and absence of losses from KRR Indonesia operations, which was disposed in FY18.

Outlook. We believe Bfood’s profitability will continue to be driven by the opening of 25-30 new Starbucks outlets annually. Despite posting EBIT losses of RM2.6m in 4QFY19, we expect KRR Malaysia to turn profitable in FY20 as Bfood continues to tweak their menu offerings and close unprofitable stores. To recap, KRR Malaysia was marginally profitable in 3QFY19.

Forecast. Given the results shortfall from weaker KKR Malaysia operations, we lower FY19-21 forecasts by 1.3%, 2.9% and 4.0% respectively. Note that our earnings forecast adjustment for FY19 is minimal given that the impact from a weaker KKR Malaysia is partially offset by the inclusion of an additional 2M to that year given the change in FYE.

Maintain BUY, TP: RM2.00. After our earnings cut and rolling over our valuation year, our TP drops to RM2.00 (from RM2.05 previously), derived from an unchanged 25x PE tagged to FY20 EPS of 8.0 sen. Despite KRR Malaysia operations returning to the red in 4QFY19 (after being marginally profitable in 3QFY19), we still see value in Bfood which trades at 22.1x FY20 PE. We are encouraged by the robust growth performance of Starbucks Malaysia, which reported SSSG of +4.0% and opening of 28 outlets in FY19 so far.

Source: Hong Leong Investment Bank Research - 14 Jun 2019