KFC Holdings (KFC) posted a higher net profit of RM38mil for4Q, bringing full-year earnings to RM144mil. The results were 13% below ourforecast and 9% short of consensus. The performance was largely marred by lossesfrom the ancillary and education divisions which crimped margins. 

Despite an 11% top line growth for FY11, net profit fell 8% YoY.Higher sales volume was attributed mainly to:- 1) Healthy  same-store-sales (SSS) growth at an estimatedmid- to high-single digit; 2) Network expansion of KFC outlets and; 3)Introduction of new product offerings. KFC added a total of 36 new outlets forFY11 (Malaysia: +24, Brunei: +3, Singapore: +3, India: +6). 

Non-core divisions of integrated poultry and education &ancillary operations fared below expectations. Higher commodity costs, namelyfeedstock for broiler farming activities, dragged down integrated poultry'sEBIT (YoY: -61%), while the education & ancillary division fell into the redwith a RM7mil loss (FY10: 5mil) as a result of increased costs from new campusopening (Bandar Dato Onn, Johor) and higher A&P. The ancillary division,which is predominantly sauce manufacturing, was affected by reduced volumes forcontract packing and higher packaging material costs.

The lacklustre performance was not surprising, given higherraw ingredients and packaging costs which escalated in 1HFY11. We are not tooconcerned about margin pressures moving forward, given the easing in soft commodityprices and the small contribution to group earnings at 4%-5%. As an indication,prices of corn and potato are 18%-22% off their respective peaks.

On a sequential basis, 4Q net profit was up 13% on the of a10% rise in revenue. This was mainly attributable to seasonally robust sales atKFC restaurants from year-end school holidays and festive celebrations. 

We have trimmed our FY12F-13F earnings forecasts by7%-10%post KFC's full-year results and our latest margin assumptions. We are keepingour projection of new KFC store openings at 36 per annum. Maintain BUY with an unchangedfair value of RM4.15/share, based on a fair PE of 18x FY13F earnings as westill like the group's highgenerative food business model. We expect theproposed takeover of KFC by 51% Johor Corporation-owned Massive Equity Sdn Bhd(MESB) to be concluded by end-1Q2012. CVC Capital Partners Asia III Limitedowns the balance of 49% of MESB.

Source: AmeSeurities