- We are upgrading Berjaya Food (BFood) to BUY, with a higher fair value of RM1.40/share (vs. RM1.00/share previously), following a company visit. Our fair value is pegged to a PE of 18.5x to our fully diluted CY13F earnings.  

- We maintain our FY13F EPS forecast, but tweaked upwards our FY14F and FY15F EPS by 2%-3%, respectively. This is to account for:-

(1) Margin recovery from Kenny Rogers Roasters (KRR) Indonesia should kick in from FY14F onwards given that operations is likely to break even by end of FY13F upon hitting 20 outlets;

(2) Successful integration of Starbucks is expected to power up the group's earnings growth with SSSG assumption of circa 15% (vs. 2HFY12: 26%) from FY13F onwards. This, we believe, will be driven by:- (i) Convenience and benefits of the 'Starbucks Card' which entails a complimentary cake and coffee during the birthday month as well as complimentary one free coffee upon the 10^th  purchase; (ii) Sales of Starbucks VIA'' instant coffee; and (iii) Overwhelming response to in-stall promotion steaming from introduction of new drinks. We have incorporated 273days of earnings impact to FY13F instead of the previously assumed nine months' as the acquisition was completed on 19 July 2012; and

(3)  We have learned that management is eyeing to accelerate KRR's expansion into the Indochina region to expand its F&B footprint regionally. If this materialise, it is expected to kick in only in FY14. Additionally, management is in talks to acquire a potential F&B company in Indonesia.  

- Management now has a more transparent and visible growth strategy following the acquisition of Starbucks. Nevertheless, we are confident that the group is able to achieve its target of 15 new KRR outlets per annum with SSSG of circa 9% in Malaysia and Indonesia, respectively. In Malaysia, three outlets have opened with another seven anticipating outlets in the pipeline. As for Indonesia, management is only short of three outlets to hit its target. Meanwhile, Starbucks have 135 outlets to-date and expects to open 15 outlets per annum up to 200 outlets within the next five years.

- Balance sheet is strong with zero borrowing, while  dividend yields stands at 3.8%-5.1%, premised on a decent dividend payout ratio of at least 40% of earnings. 

- At current level, the stock is trading at a 18x PE, within the range of its historical PE of 15x-19x. Backed by strong and growing franchise value, BFood's long term prospect remains bright. We believe earnings contributions from Starbucks will act as a strong catalyst, given the well established brand name. More importantly, earnings growth is expected to accelerate upon the break even of KRR Indonesia.

Source: AmeSecurities