BFood’s 4QFY20 Core Net Loss of -RM26.7m (vs. Core Net Loss of -RM1.4m in 3QFY20) Brought FY20 Core Net Loss to -RM15.4m, Which Is Below Ours and Consensus Expectations. The Shortfall in Earnings Was Due to Lower-than Expected Sales Amidst Covid-19 Outbreak, Fixed Cost Component of Operating Costs and Higher Finance Costs. We Lower Our FY21/22 Earnings Forecasts by 34.0%/14.7% to Account for Lower Store Openings and Weaker SSSG Going Forward. After Rolling Over Our Valuation Year From FY21 to Mid-FY22 and Accounting for Lower Earnings, Our TP Falls From RM0.90 to RM0.79 Based on An Unchanged PE Multiple of 15x. Maintain SELL.

Below expectations. 4QFY20 core net loss of -RM26.7m (vs. core net loss of -RM1.4m in 3QFY20) brought FY20 core net loss to -RM15.4m, which is below ours and consensus expectations. HLIB/consensus had expected FY20 core PATAMI of RM9.2m/RM10.2m, 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 amidst Covid-19 outbreak, fixed cost component of operating costs and higher finance costs. Core PATAMI was arrived at after adjusting for RM3.5m impairment of goodwill and PPE.

Dividends. None declared. FY20: 2 sen per share (FY19: 4 sen per share)

QoQ. Decline in sales (-29.7%) was due to restrictions on dine-in F&B operations due to the MCO. Wider core net loss of -RM26.7m (from -RM1.4m) was due to (i) lower sales; (ii) fixed cost component of costs (depreciation, rental etc.); and (iii) adoption of MFRS 16 accounting standard in 4QFY20, which resulted in finance costs increasing 93.0%. Note that lease interest expense (classified under finance costs) is higher during the initial stage of the lease period under MFRS 16.

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, 4QFY19 and 12MFY19 do not consist of the same months as 4QFY20 and 12MFY20 (i.e. 4QFY19 was Feb-Apr and 4QFY20 was Apr-Jun). However, management provided FY20 SSSG figures for Starbucks Malaysia (-3.8%), KRR (-13.0%) and Jollibean (-15.0%) operations vs. like-for-like 12 month period in the previous year.

Outlook. Going into FY21, we expect earnings growth from Starbucks operations to be tepid given (i) expected 20 outlet openings (from 25-30 before Covid-19 outbreak); and (ii) weaker SSSG due to many companies persisting with work-from-home arrangements, leading to lesser sales volumes from take-away clientele. With regards to KRR Malaysia, we expect BFood to continue with efforts to turn around KRR Malaysia operations by launching small-format outlets. However, we expect BFood to slow down the expansion of KRR Malaysia outlets from 6 to 3 in FY21 given the severity of Covid-19 on sales. Note that BFood had closed 9 KRR Malaysia outlets in 4QFY20 due to the impact of MCO on profitability. We understand turning around KRR Malaysia in the midst of economic volatility remains a challenge as KRR Malaysia operations recorded losses of -RM11.0m at the EBIT level in FY20, which were wider than the -RM7.0m losses in 14MFY19.

Forecast. We lower our FY21/22 earnings forecasts by 34.0%/14.7% to account for lower store openings and weaker SSSG going forward.

Maintain SELL, TP: RM0.79. After rolling over our valuation year from FY21 to mid FY22 and accounting for lower earnings, our TP falls from RM0.90 to RM0.79 based on an unchanged PE multiple of 15x. Maintain SELL.

Source: Hong Leong Investment Bank Research - 24 Aug 2020