KFC's  full yearearnings were below consensus but within our estimates. The stronger revenue(+11%) was attributed to better performance across all segments but its corenet profit fell 4.1% y-o-y due to higher operating expenses. EBIT margincontinue to shrink, dipping by 0.8% on costlier input and higher expansion expenditure.Maintain NEUTRAL, with our FV unchanged at RM4.00.

In line.  KFC's FY11 revenue jumped 11% y-o-y from RM2.5bn to RM2.8bn, largely contributedby higher revenue from its Malaysia and overseas operations. The opening of 24new restaurants, introduction of new products and effective marketing programs boostedrevenue at its Malaysian operations (+10.6%) while revenue from its overseas operationsimproved 14.9% y-o-y to RM449.4m from RM391m previously. Revenue in theintegrated poultry and ancillary segments grew by 10% and 2.9% respectivelywhile revenue at the education division soared 327% y-o-y. The FY11 PBT waslower than that in the previous year, during which  KFC recorded a net surplus of RM6.7m from revaluationof properties. Excluding the exceptional gain, the group's PBT was still flatat RM121.5m vs RM121.1m y-o-y given expenses from new openings and higher raw materialcosts. Despite the flat PBT, core net profit was lower by 4.1% y-o-y dueto  a higher tax rate. Q-o-q, the group'stop- and bottom-lines expanded by 9.9% and 13.4% respectively, spurred by theholiday and festive seasons.

Leaner margin.  EBIT margin slipped 0.8% from 8.7% to 7.9%,with the integrated poultry and education segments being the major drags. Thethinner margins from integrated poultry were mainly due to: i) the highercommodity prices in producing feed for broiler farming, ii) higher energy andstorage costs, and iii) higher cost to buy broilers from the open market tomeet the increasing demand from its Malaysian operation. The higher operatingexpenses incurred in setting up its new campuses in Johor and Selangor andhigher marketing cost to boost student intake also  played a part  in chipping off margins in the educationdivision.

Maintain  NEUTRAL. We remain cautious on KFC's prospects in light of a recent incidentcaught on  Youtube purportedly  depicting unruly behaviour among KFC employees.This  may dampen customer sentimentfor  the time being. Maintain NEUTRAL,with our FV at RM4.00, based on the takeover offer price.

Source: OSK188