Accelerating earnings growth. BJFOOD saw a net profit jump of 21.7% to RM22.7m in FY14 on the back of healthy revenue growth of 23.3%. More interestingly, the Group had earlier proposed to acquire the remaining 50% stake it does not already own in BStarbucks for USD88m or RM279.5m in end-July 2014. The offer price values BStarbucks at RM559m or RM24.3/share, which translates into a PER of 16.1x and P/BV of 5.1x based on the figures of its latest unaudited FY14 financial report. We view the move as a game-changer for the Group, as it will enable BJFOOD to consolidate all the earnings from BStarbucks compared to the current 50% share. Pro-forma, the consolidation would have significantly boosted its FY14 net profit by 75.7% to RM40.4m from RM22.7m. Post-acquisition, net gearing will rise to 0.74x from net cash position in FY14. The exercise is targeted to be completed by Sept 2014.

Fully capturing BStarbucks’s earnings growth. BStarbucks would be viewed as the key earnings driver for the Group moving forward due to its robust earnings growth potential. Having recorded a 3-year CAGR of 27.7% and 48.6%, respectively, for revenue and net profit from 2011 to 2014, the numbers are expected to be further enhanced with the Group aiming to add 25 new outlets per annum. Same store sales growth (SSSG) was outstanding with four years of double-digit growth rate (11%-22%) recorded during FY11-FY14, while the Group expects the momentum to be sustained moving forward. Moving forward, we project Starbucks to contribute 56.3% and 74.2% of the total revenue of the Group in FY15 and FY16, respectively.

Explosive earnings growth. The Group has been growing both its top line and bottom line numbers steadily over the years, with the most recent FY14 net profit clocking up growth of 21.7% to RM22.7m from RM18.6m in FY13. Moving forward, the Group is expected to further grow its earnings by 43% to RM32.4m in FY15E and 71.8% to RM55.7m in FY16E according to our projections mainly due to the full consolidation of BStarbucks. We deem the earnings growth impressive in contrast to the average 3.3% we forecasted for other F&B counters under our coverage universe.

Premium is the name of the game. BJFOOD expects to increase its presence by setting up 25 new outlets in FY15. Drive-throughs and standalone outlets would be the preferred model in the expansion plan as it seeks to reduce its exposure to high rental rates in popular shopping malls. The Group expects little impact from the soft consumer sentiments due to its premium branding segment with the Gen-Y being its targeted customers. We gathered that the Group commands a market share of 40-45% in the local premium coffeehouse chain market, while its nearest competitor lags far behind at 10+%. As for competition from rising numbers of coffee houses, BJFOOD takes a positive view that these establishments help to build up the coffee culture in Malaysia.

Not Rated with a FV of RM3.03, based on 19.5x PER FY16 fully-diluted EPS of 15.5 sen assuming full conversion of warrants. Share price skyrocketed to beyond the RM3 level from RM1.73 a day before the Group made the acquisition announcement as the investment community reacted positively to the acquisition. However, we deem the positives accruing from higher profit recognition from Stabucks and the more exciting earnings growth post-acquisition priced-in following the price rally. Valuation is fair at 19.5x PER, 9.6% higher than its 5-year mean and in-between the 17.1x-26.1x PER we ascribed to the F&B stocks under our coverage.

Source: Kenanga