BFood’s 2QFY20 core PATAMI of RM8.0m (QoQ: +73.9%) brought 1HFY20 sum to RM12.6m, which was in line with ours and consensus expectations, accounting for 52.5% and 48.6%, respectively. While we are encouraged by the profitability of KRR in this quarter but flat SSSG in Starbucks operation is a concern. As forecasts remain unchanged, we maintain our TP of RM1.40 based on an unchanged PE of 22x of FY20 earnings and HOLD call.

In line. BFood’s 2QFY20 core PATAMI of RM8.0m (QoQ: +73.9%) brought 1HFY20 sum to RM12.6m, which was in line with ours and consensus expectations, accounting for 52.5% and 48.6% respectively. There were no comparable YoY figures due to the change of financial year end from April to June.

Dividends. Proposed DPS of 1 sen (1HFY20: 2 sen) going ex on 11 Mar.

QoQ. Slightly higher sales (+2.0%) were due to seasonality, as school holidays and Christmas lifted overall sales. Stronger profitability (core PATAMI rose 73.9%) was driven by stronger sales as well as KRR Malaysia operation recording a profit of RM0.3m at the EBIT level vs RM1m EBIT loss in 1QFY20.

YoY/YTD. As financial year-end was changed from April to June in FY19, meaningful comparisons are not available. Note that due to the FYE change, 2QFY19 and 1HFY19 did not consist of the same months as 2QFY20 and 1HFY20 (i.e. 2QFY19 was Aug-Oct and 2QFY20 was Oct-Dec).

Outlook. We believe Bfood’s profitability will continue to be driven by the opening of 25-30 new Starbucks outlets annually. However, we are concerned that the market may be saturated already as Starbucks operation reported flat SSSG in 1HFY20. Despite KRR posting loss 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. Since the end of FY19, Bfood have closed 3 non-performing KRR stores and opened 4 new stores, leaving them with 81 stores currently operational. Despite KRR posting an EBIT profit of RM 0.3m in 2QFY20 (from EBIT loss of RM1.0m in 1QFY20), we are reticent to factor in a significant profitability as given the strong seasonal sales surrounding 2Q. Going forward, we expect KRR to continue to roll out small format outlets which have been successful for the group in recent times. We note that a 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 stores having minimal seating area as it focuses on take away transactions.

Forecast. Unchanged as Results Were in Line.

Maintain HOLD, TP: RM1.40. While we are encouraged by the profitability of KRR in this quarter, flat SSSG in Starbucks operation is a concern. As earnings were in line with our forecasts, we maintain our TP of RM1.40 based on an unchanged 22x PE of FY20 earnings and HOLD call.

Source: Hong Leong Investment Bank Research - 7 Feb 2020