INVESTMENT MERIT

- Transforming into a diversified regional play. Previously, Berjaya Food Berhad (BJFOOD) was a one-brand player which operated 53 outlets when it was listed in March 2011. Since then, BJFOOD has transformed itself into a diversified regional player in the F&B arena, driven by a string of acquisitions in 2012. Today, BJFOOD’s network comprises of staggering 274 outlets and 4 core brands, including 145 Starbucks, 69 Kenny Rogers (KRR) (Malaysia), 47 Jollibean (Singapore) and 16 Kenny Rogers (Indonesia) restaurants.

- Impressive 3-year revenue CAGR of 26% and NP CAGR of 29%. BJFOOD’s earnings track record has been equally impressive, with its net profit surging from RM8.7m in FY10 to RM18.6m in FY13 as a result of the injection of the Berjaya-Starbucks joint-venture company (July-2012) and the newly acquired Jollibean brand (Dec-2012). Going forward, we foresee the impact to be even more pronounced in the current financial year (FY14E) as both of these brands are set for meaningful full-year contributions.

- Breaking into new markets… Furthermore, various efforts are already in the pipeline to: (i) bring its Kenny Rogers brand to new markets such as Cambodia, Jollibean to Malaysia and China, and Starbucks to Brunei, as soon as the current financial year (ii) sustain Berjaya Starbucks’ track record of mid-teen SSSG for a 4th consecutive year (which would be a global record, compared to rivals such as Oldtown that is facing flattish SSSG) via new food product offerings and loyalty incentives, and (iii)broaden its sales channel via the relatively new concept of Starbucks and Kenny Roger drive-through outlets, as well as the asset light kiosk outlets for Jollibean. In all, we expect FY14E-FY15E revenue and net profit to jump by 38%-24% and 59%-27%, respectively.

- Highly scalable business… Aside from its plans to open as many as 50 outlets per annum (30 new outlets have already been confirmed for FY14E), the Group is also exploring the possibility of diversifying into the huge FMCG business under the Starbucks brand. We understand that a 3-year business plan has already been drafted by Starbucks Corp (US), and should this plan materialize, it could be a rerating catalyst for BJFOOD.

- Target price of RM2.13 based on CY14 PER of 19x. BJFOOD’s FY14E-FY15E NP growth rate of 59-27% is higher than its peer average of 15.4-16.3%. As a result of the higher than peer average growth rate, we believe that BJFOOD deserves a CY14 PER of 19x which is in line with the peak valuations for PWROOT and OLDTOWN (19-20x) when those stocks caught the attentions of foreign funds earlier this year. Also, BJFOOD could also be viewed a cheap proxy to Starbucks Corporation (US) which is expected to grow its earnings by 22.4% yet currently trading at a premium valuation of 35x to its FY14 earnings estimate as compared to BJFOOD’s 15.1x currently.

TECHNICALS

- Resistance: RM1.95 (R1), RM2.25 (R2)

- Support: RM1.60 (S1), RM1.32 (S2)

- Comments: BJFOOD’s share price exhibits obvious cyclical patterns and the recent price weakness should be viewed as a mere pause in an overall uptrend. Look to buy in between RM1.60-current levels with immediate targets of RM1.95 (R1) and possibly RM2.25 (R2) next. Downside support should be present at RM1.60, and traders should place a stop-loss 3 bids below this level (RM1.57).

BUSINESS OVERVIEW

- Berjaya Food was incorporated in Malaysia on 21st Oct 2009, and subsequently listed on the main market of Bursa Malaysia on 8 March 2011.

- Through its wholly-owned subsidiary, Berjaya Roasters (M) Sdn Bhd, the Group is principally engaged in the setting up and operations of new Kenny Rogers Roasters restaurants and the operation of its chains in Malaysia.

- More recently, Berjaya Food completed the acquisition of 51% equity interest in KRR Indonesia (Jan 2012), a 50% equity interest in Berjaya Starbucks (July 2012) and a 100% stake in Jollibean Food (Dec 2012).

BUSINESS SEGMENTS

- F&B brands under Berjaya Food’s umbrella include:

- Kenny Rogers Roasters – Malaysia (KRR Malaysia) and Indonesia (KRR Indonesia)

- Starbucks Coffee

- Jollibean Food Pte Ltd – which include brand names such as Jollibean, Sushi Deli, Kopi Alley and Dango.

SWOT ANALYSIS

- Strengths: Strong branding and retail network, strong same store sales growth for Starbucks (+17%, FY13).

- Weaknesses: High store count of 25-30 outlets needed before KRR Indonesia can break-even.

- Opportunities: New markets such as Cambodia, Brunei and Indonesia, potential to diversify into the FMCG business for Starbucks coffee products

- Threats: Rising rental rates, national minimum wage policy

Source: Kenanga