Bfood’s posted 1HFY21 earnings of RM21.5m (+70.3% YoY). This was above ours and consensus expectations thanks to continued turnaround in KRR operations, lower operating costs from rental rebates, and lower effective tax rate. We raise our FY21/22/23 forecasts by 56.6%/39.8%/27.4% to account for KRR returning to profitability, better cost control and lower effective tax rate. We lift Bfood’s PE multiple from 15x to 17x (in line with peers). As a result, our TP rises from RM1.12 to RM1.78. Upgrade to BUY.

Above expectations. 2QFY21 core PATAMI of RM11.1m (QoQ: +7.2%, YoY: +38.8%) brought 1HFY21’s sum to RM21.5m (+70.3% YoY). This was above ours and consensus expectations, accounting for 102.4% and 77.1%, respectively. The positive results surprise was due to continued turnaround in Kenny Rogers Roasters (KRR) operations, lower operating costs from rental rebates, lower labour cost during the CMCO period from mid-October and lower effective tax rate.

Dividends. DPS of 0.5 sen declared, going ex on 11 Mar 2021 (1HFY21: 1.5 sen). 2QFY20: 1 sen per share (1HFY20: 2 sen).

QoQ. Despite revenue falling -3.7% due to lower footfall during 2Q21 from CMCO from mid-Oct, core PATAMI rose +7.2% due to better cost management.

YoY. Lower same-store-sales growth (SSSG) figures in all business segments apart from Starbucks Brunei led to sales declining -5.4%. Weaker sales were due to CMCO impact on foot traffic. Despite this, core PATAMI rose +38.8% due lower operating costs from lower labour costs and rental rebates.

YTD. Sales declined -2.7% mainly due to Covid-19 and CMCO impact on foot traffic to retail areas in 1HFY21. Despite this, core PATAMI rose drastically by +70.3%. This was due to (i) turnaround in KRR operations from the closure of three non-performing stores (EBIT: 1HFY21: RM0.9m vs. 1HFY20: -RM0.7m); (ii) lower effective tax rate of 37.1% in 1HFY21 vs. 42.0% in 1HFY20; (iii) lower operating costs from rental rebates from shopping malls due to Covid-19 and lesser staff cost.

Outlook. We are greatly encouraged by the turnaround in KRR’s fortunes. Despite CMCO occurring in 2QFY21, we are impressed that the business unit has managed to remain profitable after continued losses since FY19 (Figure #2). We note that Bfood have closed 3 hugely unprofitable outlets which has contributed to the turnaround. To date, there are 70 KRR stores. Going forward, we expect KRR to remain profitable, particularly given the recent announcement by the government to permit dine-in operations (restricted to 2 pax per table for now). With regards to Starbucks, we expect Bfood to open between 20-25 Starbucks outlets in FY21 (from 25-30 before Covid-19 outbreak). To date, they have opened 9 stores in 1HFY20 (1QFY21: 6, 2QFY21: 3). We are also encouraged by Bfood’s new business venture “Sala”, a latin-inspired vegan restaurant (Figure #3). Bfood expects to double the number of Sala outlets to 6 this year. While still a small part of the business, we reckon this venture has potential, given the rise in popularity of plant based eating habits.

Forecast. We raise our FY21/22/23 forecasts by 56.6%/39.8%/27.4% to account for KRR returning to profitability, better cost control and lower effective tax rate.

Upgrade to BUY, TP: RM1.78. With the government permitting dine ins again, tilting the bias towards further “economic reopening”, we lift Bfood’s PE multiple from 15x to 17x (peers average) (Figure #4). As a result, our TP rises from RM1.12 to RM1.78.

Upgrade to BUY.

Source: Hong Leong Investment Bank Research - 10 Feb 2021