BFood’s 2M5QFY19 core PATAMI of RM0.2m brought 14MFY19m core PATAMI to RM26.3m. This was below our expectations, accounting for just 83.5% of our full year estimates. Given the results shortfall from weaker KKR Malaysia operations, we lower FY20/21 forecasts by 7.3%/7.3% respectively to account for slower than expected turnaround in KRR Malaysia operations. Maintain BUY call with a lower TP of RM1.85 based on an unchanged 25x PE of FY20 EPS of 7.4sen.

Below expectations. BFood’s 2M5QFY19 core PATAMI of RM0.2m brought 14MFY19m core PATAMI to RM26.3m. This was below our expectations, accounting for just 83.5% of our full year estimates. There are no consensus numbers available as Bfood had recently changed its FYE from April to June. The shortfall in earnings were due to expenses incurred from the closure in non-performing KRR Malaysia stores.

Dividends. None declared (14MFY19: 4.0 sen, 12MFY18: 4.0 sen).

2M5QFY19. Weak core PATAMI of RM0.2m was mainly due to significant expenses incurred in the closure of non-performing KRR Malaysia stores. As a result of the incurred expenses, KRR losses at the EBIT level were RM7.0m (vs RM2.6m in 4QFY19 and break even in 3QFY19).

QoQ/YoY/YTD. Meaningful comparisons are not available due to the change in financial year-end.

Outlook. We believe BFood’s profitability will continue to be driven by the opening of 25-30 new Starbucks outlets annually. Despite posting wide EBIT losses of RM12.4m in 14MFY19, we expect KRR Malaysia to narrow this in FY20 as we understand the bulk of the losses stemmed from the closure of non-performing stores. Going forward, we expect BFood to continue to roll our small format outlets (small real estate requirement and minimal seating space) which have been successful for the group in recent times.

Forecast. Given the results shortfall from weaker KKR Malaysia operations, we lower FY20/21 forecasts by 7.3%/7.3%, respectively to account for slower-than-expected turnaround in KRR Malaysia operations.

Maintain BUY, TP: RM1.85. After our earnings adjustment, our TP falls to RM1.85 (from RM2.00 previously), derived from an unchanged 25x PE tagged to FY20 EPS of 7.4 sen. Despite slower than expected turnaround in KRR Malaysia operations, we are encouraged by the robust growth of Starbucks Malaysia, which we expect to continue to open 25-30 stores per annum going forward.

Source: Hong Leong Investment Bank Research - 21 Aug 2019