• BUY, new DCF-based MYR4.20 TP from MYR3.05, 31% upside with c.4% FY22F (Jun) yield. We hosted a virtual meeting with Berjaya Food’s CEO Dato’ Sydney Quays and CFO Louise Chin, and come away feeling positive on the company’s earnings sustainability and outlook beyond the recovery picture. Other than the group’s commendable near-term earnings delivery – underpinned by high sales volumes – we also like its deft execution of business strategies which have strengthened business fundamentals in spite of the pandemic – with a robust expansion plan in the works.

• Not just a recovery play. BFood’s outperformance in 2QFY22 was due to a combination of revenge spending and the successful rationalisation of its business fundamentals. Management addressed the question on whether its stellar results can be sustained, and said that its near-term outlook should be underpinned by the further relaxation of movement restrictions and longer operating hours. These would be further complemented by the reopening of international borders. While we think that earnings in the coming quarters may not reach its record high of MYR38m (booked in 2QFY22), due to the lesser degree of pent-up demand as well as off-season factors, full-year growth should still be commendable. This should stem from the aforementioned reasons, and effective business strategies across its brands to drive sales.

• Robust expansion plan. 70% of BFood’s MYR300m capex allocation over the next three years is meant for the physical expansion of its store network, and the integration of state-of-the-art digital solutions into its business – with a target of 25-30 new Starbucks outlets per year.

• Management remains aware of supply chain bottlenecks and inflationary pressures, but also said that it has not increased prices. Instead, it has embarked on cost optimisation efforts to mitigate margin pressure – these include portioning existing product offerings. In view of its minimal price adjustments this year, BFood’s margins may taper off marginally moving forward (from c.25% in 2QFY22, driven by higher sales volume).

• Stronger confidence in Kenny Rogers Roasters (KRR). KRR booked a strong turnaround in 2QFY22, with an EBIT of MYR5.5m (vs a pre-tax loss of MYR2.5m in 1QFY22, and MYR0.35m EBIT in 2QFY21). Kitchen-sinking measures to shutter underperforming stores and revamp its offerings have borne fruit. We believe that the worst is over for this franchise, and expect it to be in the black in the quarters ahead.

• We raise FY22-24F earnings by 18-32% on BFood’s refreshed sales growth and margin assumptions, which were previously more conservative. Rolling forward our base year to FY23, our TP rises to MYR4.20, implying 18x FY23F P/E or +1SD from the 5-year mean – at a slight premium to its peer average, given its exciting outlook. We also ascribe a 2% ESG premium to derive our TP, as BFood’s ESG score of 3.1 is a tad higher than the country median. Downside risks: i) An unsustainable turnaround in KRR; and ii) the emergence of a new COVID-19 variant leading to restrictions being re-imposed.

Source: RHB Research - 16 Mar 2022