We are upbeat with the breaking even of Kenny Rogers Roasters (KRR), post disposal of its Indonesian unit in FY18. Starbucks continues to expand its base, banking on drive-through outlets. Declining coffee prices could eventually translate positively to margins. Trading Buy with a FV of RM2.15 derived from a 20.0x FY20E PER, being the stock’s 2-year Fwd. PER average. The valuation is at a slight premium granted by its: (i) strong international brand equity, and (ii) wider outlet base.

In Nov 2017, the group disposed its entire 51.0% stake in PT Boga Lestari Sentosa, Indonesia, which developed the KRR chain there. The segment suffered poor customer take-up while over-expansion led to overhead costs overrun, resulting in an average operating loss of c.RM9.0m between FY15- FY17. A one-off restructuring exercise expense of RM15.4m was incurred in FY18 to facilitate the disposal. Adding to the trimming of less-profitable locations, from 93 stores in FY15 to 77 stores in 3Q19, the brand is seeing a sustainable turnaround from its leaner structure, having already broken even at the operating level in 3Q19.

The Starbucks coffee chain contributes to c.80% of group sales, predominantly operating in Malaysia with an estimated 282 stores and 4 stores in Brunei as of 3Q19. More strategic openings are in the pipe-line, at high-traffic locations such as new public transport hubs and stations as well as drivethroughs (currently at 42 stores) at highway rest stops. The brand previously faced cost pressures impacted by high commodity prices and strengthening of foreign currencies.

We anticipate near-term prospects to be led by store base growth, with 25 new Starbucks stores and 3 new KRR stores per year. Meanwhile Jollibean Foods, Singapore could persist to record thinning losses as it restructures its staff count and store base.

Source: Rakuten Research - 16 May 2019