We believe Bfood’s profitability will continue to be driven by the opening of 25- 30 new Starbucks outlets annually. Furthermore, a leaner concept KRR stores would enable the group to continue maintaining its profitability. As for Sala, despite being at a nascent stage, with the growing popularity among health conscious consumers we opine this would be a worthwhile venture for the group. We downgrade our rating to HOLD (from Buy), as valuation now seems fair following recent share price performance. Our TP of RM2.10 (from RM1.78), is based on higher 20x PE in line with peers’ average (from 17x).

We Hosted a Virtual Meeting With Bfood With the Following Key Takeaways:

Now serving vegan customers. Bfood’s new business ventures “Sala”, a vegan Texas-Mexican inspired restaurant currently stands at 3 stores. Bfood expects to double the number of Sala outlets to 6 this year (2 stores are currently on track to open in the next 2 months). While still a small part of the business, we reckon this venture has potential, given the rise in popularity of plant based eating habits. At this juncture, the prospective new stores are targeted to open within the Klang Valley vicinity. We reckon that these will boost Bfood’s diverse offerings with the growing health consciousness among the urbanites. Additionally, veganism also bodes well with the heighten focus on ESG. Based on International Livestock Research Institute, meat production places an enormous strain on the environment in regards to the greenhouse gases they emit. It is estimated that if majority of the world population switched to a plant-based diet, it would be able to reduce the greenhouse gases emitted from food production by a staggering 70%.

Starbucks. Currently Starbucks stands at 326 stores (FY20: 316 stores) with 10 stores successfully launched in 1HFY21. Bfood targets to roll out 15-20 stores in the next 6 months with focus for drive-through concept stores (currently at 55 stores). Management shared that the take up for takeaway and drive-through have been robust during MCO2.0. The online delivery sales have spiked to the range of 20-30% of revenue contribution during the current CMCO, however with the easing of restriction and normalization of 100% office capacity from 1 April, management expects this to trend lower at 10% as store footfall are expected to recover. Moreover, we are encouraged by Starbucks Reserve growing popularity that garner blooming interests from the public, despite located at the quite corner of Tropicana City mall.

KRR. Currently stands at 70 stores, KRR will continue to close unprofitable large format stores and open small format outlets instead. In light of increasing popularity for take-away, Bfood have launched KRR cloud kitchen in Grab Kitchen and Panda Kitchen to cater to the demand (see Figure #1 and #2). We understand that this concept serves KRR menu without the existence of physical store, requiring only minimal capex of a regular store’s start-up. Additionally, KRR is also able to benefit from the ready access to the delivery partner merchant support tools, strong delivery network and wide customer base.

Outlook. We believe Bfood’s profitability will continue to be driven by the opening of 25-30 new Starbucks outlets annually. We are still positive on Starbucks which continues to grow via new outlet openings and higher sales from active promotions and continual innovative products. Furthermore, a leaner concept KRR store would enable the group to continue maintaining its profitability. As for the new Sala outlets, despite being at a nascent stage, with the growing popularity among health conscious consumers we opine this would be a worthwhile venture for the group.

Forecast. As the meeting yielded no surprise, we keep our forecasts unchanged.

Downgrade to HOLD, TP: RM2.10. We downgrade our rating to HOLD (from Buy earlier), as valuation now seems fair following recent share price performance. Our revised TP of RM2.10 (from RM1.78), is based on higher 20x PE in-line with peers’ average (from 17x). Note that share price has appreciated 48% since we upgraded the stock to a BUY on 10 Feb 2021.

Source: Hong Leong Investment Bank Research - 16 Apr 2021