We met with BFood’s management recently. Maintain BUY with a higher TP of MYR4.30 (from MYR3.90, 61% upside), after rolling over our valuation to 2016. We remain confident on the company’s prospects going forward, as we believe its Starbucks business will continue to propel its earnings growth. We expect start-up costs associated with its overseas ventures to remain well-contained.

• Strong sales in 4QFY15 (Apr). We understand that Berjaya Food’s (BFood) 4QFY15 performance staged a strong recovery. Our implied revised 4Q net profit of MYR10.2m suggests a 13.3% QoQ improvement from the seasonally softer 3QFY15. This can be attributed to stronger sales in the quarter, driven by heavy promotional and marketing activities for its core business of Starbucks and Kenny Rogers Roasters (KRR).We expect 4QFY15 results to be announced on 15 Jun.
• Other updates. BFood opened six new Starbucks outlets and three new KRR outlets in 4Q alone. Management also revealed that the commencement of its Starbucks’ fast-moving consumer goods (FMCG) business will be delayed to at least mid-2016 due to a pending sourcing arrangement. Note that our forecasts have not included this FMCG business.
• Enhancing KRR’s profitability. Management indicated that KRRMalaysia will remain profitable, while KRR Indonesia is estimated to make small losses due to the challenging operating environment there.Hence, BFood plans to focus on enhancing its profitability by introducingmore products and rationalising non-performing stores.
• Forecasts and risks. We trim our earnings forecasts for FY15-17 by 4.3%, 7.3%, and 1.9% respectively, after tweaking our margin assumptions lower to reflect a more challenging operating environment . Key risks to our recommendation include: i) worse-than-expected consumer reaction post-goods and services tax (GST), ii) unfavourable currency trends, and iii) higher raw material costs.
• Investment case. We lift our TP to MYR4.30 (from MY3.90), after rollingover our valuation to 2016 (previously FY16) and applying an unchanged target P/E of 24.6x, which is in line with the valuation of its regional peers(19-31x FY16F P/E). BFood is trading at an undemanding FY16Fvaluation of 19.3x P/E, vs its 3-year earnings CAGR of 44.8% for FY14-17F.

Growth Still Intact 4QFY15 sales. We gather that BFood’s core business of Starbucks recorded stronger same-store sales growth (SSSG) in Feb 2015. This was driven by: i) strong sales during the Lunar New Year holidays, ii) promotional activities (discounts on Starbucks merchandise), iii) healthy sales of its reload cards, and iv) opening of new outlets. As at end-4QFY15, BFood has a total of 197 Starbucks outlets in Malaysia and Brunei (FY14: 170 outlets).

Meanwhile, BFood’s Kenny Rogers Roasters (KRR) business also managed to record a positive SSSG in February on the back of meal promotions and a newlylaunched menu. Management mentioned that KRR has recently introduced fish and grilled steak in its offerings at attractive price points, which have seen good response from its customers. In addition, KRR has also launched its prepaid cards, which managed to bring in about 100,000 subscribers.

We believe that BFood has continued to do well in March and April, with differentmarketing and promotional efforts boosting its sales.Store expansion. As at end-4QFY15, BFood has a total of 363 outlets, of which 118 are KRR (Malaysia, Indonesia and Cambodia), 197 outlets are Starbucks (Malaysia and Brunei), and 48 outlets are Jollibean (Singapore and Malaysia). We understand that BFood managed to meet its new store target for KRR in Malaysia and Cambodia, and Starbucks in Malaysia and Brunei, while it slightly missed its FY15 outlet opening target for KRR Indonesia and Jollibean in Singapore and Malaysia.

KRR Indonesia. Management indicated that KRR Indonesia is experiencing a challenging operating environment due to stiff competition from local players. Thus, BFood is looking to change its strategy for its KRR business there by focusing on enhancing the profitability first instead of expanding continuously. Management intends to do this by offering more products (similar to KRR Malaysia’s strategy) and closing down some of its non-performing stores. BFood estimates another two years for its Indonesian business to break even.

Repayment of debt. BFood plans to pare down its debt by MYR25m-30m in FY16. In FY15, BFood managed to pay about MYR93m-95m, bringing its borrowing levelssignificantly lower from its initial MYR283.4m loan in Sep 2014 for the acquisition of the remaining stake in Starbucks Malaysia. Thus, we believe interest expense will gradually decline, in tandem with the repayment.

Starbucks’ FMCG business. We gather that BFood’s initial target to secure Starbucks’ ready-to-drink product distribution in Malaysia by mid-2015 will likely be delayed to mid-2016 at least, as it is finalising the terms with Starbucks Coffee International (SCI) on product sourcing. BFood had initially looked to source the products from a third-party in Korea. However, since SCI is currently building its own plant in China, it has requested BFood to source the mentioned products from the new plant, hence causing the delay. As this has yet to be finalised, we have not factored in any earnings contributions from its FMCG arm into our BFood’s Starbucksnumbers at this juncture, although management is excited about the prospects of this new business stream.