BFood’s 3QFY20 core losses after tax of -RM1.4m (QoQ: from +RM2.2m in 2QFY20) brought 9MFY20 sum to RM11.2m, which was below ours and consensus expectations, accounting for 56.0% and 50.7%, respectively. The shortfall in earnings was due to lower-than-expected sales resulting from Covid-19. We lower our FY20/21/22 forecasts by 54.1%/9.8%/5.3% to account for significantly weaker sales volumes in 4QFY20 and lesser -than-expected Starbucks store openings for the time being. Despite the lower earnings adjustment, our TP rises from RM0.80 to RM0.90 (pegged to an unchanged 15x PE multiple) as we rollover our valuation to FY21. Maintain SELL.

Below expectations. BFood’s 3QFY20 core losses after tax of -RM1.4m (QoQ: from +RM2.2m in 2QFY20) brought 9MFY20 sum to RM11.2m, which was below ours and consensus expectations, accounting for 56.0% and 50.7%, respectively. YoY/YTD comparisons are not available due to FYE change (from Apr to Jun). The shortfall in earnings was due to lower-than-expected sales resulting from Covid-19 outbreak which dried up foot traffic to F&B retail outlets.

Dividends. None. 9MFY20 dividend amounted to 2 sen per share.

QoQ. Decline in sales (-13.9%) was from the forced closure of dine-in F&B from mid March due to the MCO in addition to already declining foot traffic from consumers fear of Covid-19 outbreak before that. The decline in sales resulted in an even steeper decline in EBIT (-70.9%) due to fixed cost component of costs (rental, staff cost, depreciation etc.). Overall, BFood recorded core losses after tax of -RM1.4m (from PATAMI of RM2.2m in 2QFY20) as their EBIT was insufficient to offset their finance costs.

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, 3QFY19 and 9MFY19 do not consist of the same months as 3QFY20 and 9MFY20 (i.e. 3QFY19 was Nov-Jan and 3QFY20 was Jan-Mar). However, management provided YoY SSSG figures for Starbucks Malaysia (-2.0%), KRR (-21.0%), Jollibean (-15.0%) and Starbucks Brunei (+3.4%) operations vs. SPLY.

Outlook. Before Covid-19 outbreak, we had expected profitability going forward to be driven by (i) opening of 25-30 new Starbucks outlets per annum; (ii) turn around in KRR Malaysia performance (which had shown signs of better performance in 9MFY20, with narrower losses before tax of -RM2.4m, which was significantly better than the -RM7.0m losses before tax recorded in 14MFY19). As Covid-19 outbreak is expected to dampen discretionary spending in 1HFY21 (2HCY20), we reckon BFood will slow down the expansion of Starbucks outlets (of just 20 stores from our earlier expectation of 25). Additionally, we expect turn around in KRR operations to take longer than we had previously expected.

Forecast. We lower our FY20/21/22 forecasts by 54.1%/9.8%/5.3% to account for significantly weaker sales volumes in 4QFY20 and lesser-than-expected Starbucks store openings for the time being.

Maintain SELL, TP: RM0.90. While we expect steeper QoQ losses in 4QFY20, the transition to CMCO from MCO rules provide a small reason for optimism. Despite the lower earnings adjustment, our TP rises from RM0.80 to RM0.90 (pegged to an unchanged 15x PE) as we rollover our valuation to FY21. Despite the onset of CMCO, we have reason to believe profitability will be tepid, given expected weaker discretionary spending for the remainder of CY20, and CMCO standard operating procedures which restrict dine-in from operating at full capacity.

Source: Hong Leong Investment Bank Research - 8 Jun 2020