As financial year-end was changed from April to June in the previous quarter, meaningful comparisons are not available. BFood’s 1QFY20 core PATAMI of RM4.6m was below ours and consensus expectations, accounting for just 16.4% and 15.8% respectively. The shortfall in earnings was mainly due to higher-than-expected raw material costs (due to weak ringgit), effective tax rate (46.6%) and interest cost (due to MFRS 16 implementation). After accounting for higher interest costs and depreciation charge from the adoption of MFRS 16, in addition to steeper raw material cost, our FY20/21 earnings fall by 13.9%/15%. After accounting for a lower PE multiple and changes in forecasts, our TP falls from RM1.60 to RM1.40 pegged to 22x (previously 25x) FY20 EPS of 6.4 sen. Downgrade from BUY to HOLD.

Below expectations. BFood’s 1QFY20 core PATAMI of RM4.6m was below ours and consensus expectations, accounting for just 16.4% and 15.8% respectively. The shortfall in earnings was mainly due to higher-than-expected raw material cost (due to weak ringgit as Starbucks sources coffee beans, frappuccino mix etc. from Starbucks Corp in USD), effective tax rate (46.6% vs. our assumed effective tax rate of 40.0%) and interest cost (due to MFRS 16 implementation).

Dividends. Declared DPS of 1 sen going ex on 11 Dec 2019.

1QFY20. Strong revenue figure of RM180.4m was driven by opening of Starbucks outlets, which is currently at 303 (up from 291 at end-FY19). Despite this, SSSG for the current quarter was disappointing (Starbucks: flat, KRR: -2%, Jollibean Singapore: -1%).

QoQ/YoY/YTD. As financial year-end was changed from April to June in the previous quarter, meaningful comparisons are not available. Note that due to the FYE change, 5Q19 only consisted of 2 months and 1Q19 were not the same calendar months (ie. 1Q19 was May, June, July and 1Q20 was July, August, September).

Outlook. We believe BFood’s profitability will continue to be driven by the opening of 25-30 new Starbucks outlets annually. Despite KRR posting wide losses before tax of RM12.4m in 14MFY19 (RM7.0m losses after removing one-off expenses associated with store closures), we expect KRR to narrow this in FY20. Note that BFood has closed 3 KRR stores since end-FY19, leaving 77 operational stores currently. In 1QFY20; KRR registered losses of approximately RM1.0m at the EBIT level. Going forward, we expect KRR to continue to roll our small format outlets which have been successful for the group in recent times. We note that small format store requires just a fifth of the capex of regular store’s start-up cost given the smaller real estate required in addition to lower rent. This is due to small format store having minimal seating area as it focuses on take away transactions.

Forecast. After accounting for higher interest costs and depreciation charge from the adoption of MFRS 16 in addition to steeper raw material cost, our FY20/21 earnings fall by 13.9%/15%.

Downgrade to HOLD, TP: RM1.40. While we are encouraged by the narrowing losses of KRR in this quarter, flat SSSG and higher raw material cost to Starbucks operations are a threat to profitability. As such, we lower our PE multiple from 25x to 22x. After accounting for a lower PE multiple and changes in forecasts, our TP falls from RM1.60 to RM1.40 pegged to 22x FY20 EPS of 6.4 sen. Downgrade from Buy to HOLD.

Source: Hong Leong Investment Bank Research - 12 Nov 2019