BFood’s 1QFY21 core PATAMI of RM10.4m (from -RM26.7m losses in 4QFY20, YoY: +125.1%) is above ours and consensus expectations, at 68.9% and 51.1% of forecasts, respectively. We increase our FY21/22 earnings forecasts by 39.1%/15.4% to account for the quicker-than-expected turnaround in KRR profitability. After our earnings adjustment and rolling over our valuation year from mid-FY22 to FY22, our TP rises from RM0.79 to RM1.12 based on an unchanged 15x PE multiple. Upgrade to HOLD.

Above expectations. 1QFY21 core PATAMI of RM10.4m (from -RM26.7m losses in 4QFY20, YoY: +125.1%) is above ours and consensus expectations, at 68.9% and 51.1% of forecasts, respectively. The better-than-expected earnings was due to KRR operations unexpectedly returning to profitability due to the closure of many nonperforming outlets.

Dividends. DPS of 0.5 sen declared, going ex on 9 Dec 2020. 1QFY20: 1 sen per share.

QoQ. Sales rebounded +62.0% mainly due to easing of MCO restrictions. Note that restrictions on dine-in F&B operations were at its height during 4QFY20. Bfood’s core PATAMI of RM10.4m marked a return to profitability, after recording -RM26.7m losses in 4QFY20, which was due to operational disruptions related to MCO restrictions.

YoY. While sales reached pre-Covid-19 levels (+0.2%), this is based on a higher number of Starbucks stores (Bfood had opened 25 Starbucks stores in FY20). Core PATAMI more than doubled (+125.1%) mainly due to closure of many non-performing Kenny Rogers Malaysia (KRR) stores. Note that Bfood had closed 14 and opened 7 KRR stores in FY20.

Outlook. Going forward, we expect Bfood to (i) open a total of 18 Starbucks outlets (6 already opened) in FY21 (from a planned 25-30 before Covid-19 outbreak) mainly in the drive-thru format and in locations out of Selangor and (ii) open up to 5 smallformat KRR stores due to Covid-19 outbreak impacting dine-in operations. Note that small-format stores are mainly set up to serve take away and delivery orders. We are positive on Bfood’s strategy to pivot to small format stores at the expense of larger dine-in restaurants. Additionally, we are encouraged by KRR Malaysia’s return to profitability in 1QFY21 (RM0.5m at the EBIT level). Note that the division reported losses at the EBIT level of -RM11.0 in FY20.

Forecast. We increase our FY21/22 earnings forecasts by 39.1%/15.4% to account for the quicker-than-expected turnaround in KRR profitability.

Upgrade to HOLD. After our earnings adjustment and rolling over our valuation year from mid-FY22 to FY22, our TP rises from RM0.79 to RM1.12 based on an unchanged 15x PE multiple. While KRR returning to profitability bodes well for the group, Starbucks remains the main growth driver for Bfood. While the worst may be over for Bfood, we reckon Starbuck’s sales per store will continue to remain below previous years’ level due to soft foot traffic to public areas and continued work-fromhome arrangements in many workplaces.

Source: Hong Leong Investment Bank Research - 13 Nov 2020