With further easing of restrictions following the encouraging vaccination rate, we are delighted to witness recovery set in motion for BFood. We gather that KRR sales doubled up as compared to sole delivery sales during dine-in restrictions. As for Starbucks, the group experienced 30-40% increase sales with the recovery in foot traffic and aggressive outlet expansion. Overall, we expect minimal impact from the rally in commodity prices as they are generally hedged on a contractual basis 1-2 years in advance. Maintain BUY with TP of RM2.69 based on unchanged 20x PE multiple pegged to FY22 EPS.

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

Robust recovery. With further easing of restrictions following the encouraging vaccination rate, we are delighted to witness recovery set in motion for BFood namely, Starbucks and Kenny Roger Roasters (KRR). We gather that KRR sales doubled up as compared to sole delivery sales during dine-in restrictions. As for Starbucks, the group experienced 30-40% increase sales with the recovery in foot traffic and aggressive outlet expansion. Subsequently, contributions from food aggregators (e.g. GrabFood, Foodpanda, etc.) eased to c.17% of total sales vs the peak of 25% during dine-in restrictions. Note that the margins from food aggregators are lower as compared to the regular sales from in-store channel.

Starbucks. Currently Starbucks stands at 331 stores (FY21: 327 stores). BFood targets to roll out 35-38 stores in FY22 with focus for drive-through concept stores. Management shared that the take-up for takeaway and drive -through have been robust with the change in consumer behaviour. We understand that the strong sales momentum that surpasses the pre-pandemic level was on the back of higher ticket size from drive-through stores vs regular in-store channel. Additionally, the group is also actively ramping up its menu offering with seasonal drinks/designer series that gain more traction from customers. Note that the margins for seasonal items are higher as compared to regular menus. Moreover, we are encouraged by Starbucks’ recovery and expect the momentum to sustain with the anticipation of seasonally strong year-end.

KRR and Sala. KRR currently stands at 71 stores and the group will continue to close unprofitable stores on case-by-case basis. BFood targets to open 3-4 additional stores in FY22 with focus on small format outlets. Improved mobility with resumption of domestic tourism should bode well for KRR that rely heavily on dine-in sales. As for its new venture in vegan Tex-Mex restaurant, Sala stands at 6 stores with target of 3- 5 additional opening for FY22.

Manageable impact from heighten raw material costs. Management expect minimal impact from the increase in raw material costs. We understand that the coffee beans are supplied directly from the Starbucks US and other raw material prices are generally hedged on a contractual basis 1-2 years in advance. Overall, we expect minimal impact from the rally in commodity prices on the back of Starbucks’ high margin model. However, we note that minor margin pressure could possibly come from the increase in staff cost as the group is ramping up in expanding its footprint.

Forecast. Unchanged.

Maintain BUY, TP: RM2.69 based on unchanged 20x PE multiple pegged to FY22 EPS. 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.

Source: Hong Leong Investment Bank Research - 28 Oct 2021