- Review of 9M14 results. In March, BJFOOD reported 9M14 earnings of RM17.7m (+26% YoY) on the back of RM86.6m (+29% YoY) revenue. Revenue growth was driven by the consolidation of the full 9-month revenue of Jollibean (acquired on 7 Dec 2012) as well as additional revenue from new Kenny Roger Roasters (KRR) restaurants opened in Indonesia, although operating margins were markedly lower (-3.8ppt from 11.3% in 9M13 to 7.5% in 9M14) on a YoY basis due to a higher proportion of operating costs for KRR Malaysia. The mitigating factor being an increase store in openings and a profit contribution from jointly owned Starbucks Malaysia.

-  Earnings miss on set-backs. Despite the stellar growth, the 9M14 NP fell below expectations at 60% of our FY14 forecast which also underpinned the slight retreat in BJFOOD’s share price since our “Trading Buy” recommendation on the 3rd Oct 2013. From our recent conversation with BJFOOD’s management, we learnt that aside from the more cautious consumer spending habits, BJFOOD’s topline and margins were also affected by a number of setbacks including: (i) the closure of Genting Outdoor Theme Park which affected one of KRR Malaysia’s top performing outlets, (ii) flood situation in Kuantan which affected three KRR outlets, and (iii) a change in labor laws in Singapore which resulted in manpower shortages for Jollibean Singapore.

- Near-term pains… As we look towards the upcoming earnings season, we expect BJFOOD’s results to reflect a challenging business environment as water rationing across the Klang Valley disrupted operations and the abovementioned setbacks spill over to the 4Q14 period.

- That said, the longer-term prospects remain promising as BJFOOD accelerates its store expansion plans for Starbucks Malaysia (from 18 outlets/annum to 25-30 outlets/annum). The recent outlet opening in Brunei in Feb 2014 has also shown encouraging results and management expects to open 3 more outlets which would contribute directly to the Group’s topline (note that Starbucks Brunei is 80% owned by BJFOOD compared to Starbucks Malaysia which is 50% owned). Furthermore, US-based Starbucks Corp has hired a MD to head the FMCG segment in Asia-Pacific region, and believe this recent development could potentially pave the way for BJFOOD to diversify into the huge FMCG business under the Starbucks brand.

- Target price of RM1.96 (from RM2.13 earlier). Even as we lower our FY14-FY15E NP forecast to RM23.4m-RM29.9m (from RM29.6m-RM37.2m), this still represents an impressive NP growth of 26%-28% for BJFOOD. We are however switching our recommendation from Trading Buy to Not Rated in order to rationalize our “On Our Radar” stock coverage. At the same time, we are rolling over the valuation base year from CY14 to CY15 while maintaining our PER valuation at 19x. We believe that this valuation is justified not only because of the strong growth ahead, but also in view of the recent Berjaya-related IPO (7-Eleven Malaysia) which is bound to draw investor interest towards BJFOOD.

Source: Kenanga