• Keep BUY, with new DCF-derived MYR4.80 TP from MYR4.20, 30% upside and c.4% yield. 3QFY22 (Jun) results beat expectations again, attributable to management’s effective business strategies implemented over the past year, that led to robust SSSG. With Berjaya Food currently trading at an undemanding 13x FY23F P/E, below its 5-year mean, we deem the valuation attractive, considering its strong positioning as a cyclical play, improving fundamentals, and consistently strong earnings delivery.

• Exceeding expectations again. BFD reported 9MFY22 core net profit of MYR85.1m (+139% YoY), making up 93% and 100% of our and consensus’ full-year forecasts. Although QoQ performance was softer (with 3QFY22 revenue and earnings dropping by 9.8% and 25% for off-season factors), YoY performance remained strong. 3Q/9MFY22 revenue grew by 35.4% and 31.7% YoY and earnings by 153% and 139% YoY on the back of healthy SSSG, particularly for Starbucks, thanks to the resumption of interstate travel. We were previously a tad conservative in our expectation for 3QFY22 due to the Omicron wave and likelihood of waning revenge spending. Nevertheless, note that 3QFY22 earnings of MYR31.7m are also significantly higher than the MYR4m reported in 4QFY19 (Apr) – a testament to the effective business rationalisation efforts over the past couple of years that are bearing fruit. A third interim dividend of 1.5 sen was declared for the quarter.

• Outlook. The broader economic reopening should lead to foot traffic across BFD’s brands continuing the upward momentum, complemented by strong purchasing power, and underpinned by income recovery and improving employment rates. Its aggressive seasonal promotions also work well in reviving consumption habits, with consumers having been in lockdown for a majority of the past two years. Growth in the medium term should be driven by its expansion plans of 30-35 Starbucks outlets a year (18 new Starbucks outlets YTD), and we believe that the brand’s already entrenched network suggests that the expansion will be into smaller towns and cities – which could contribute to sustainable sales improvements moving forward. We also like its focus on drive-through store formats which have fared well through the pandemic. KRR remained profitable in 3QFY22 and should continue to be, post-rationalisation (menu revamp and store closures) – on track to report its first profitable full year since FY16. In essence, the improvement in BFD’s fundamentals, driven by sound business strategies, indicates that strong earnings delivery should be sustainable in the upcoming quarters – yet to be priced in by the market, in our view.

• Maintain BUY. We raise FY22F-24F earnings by 16-11%, refreshing our sales growth assumptions. Our new MYR4.80 TP implies an 18x FY23F P/E, which is +1SD from its 5-year mean. We ascribe a 2% ESG premium to our TP, considering BFD’s ESG score of 3.1, which is above the country median.

Source: RHB Research - 12 May 2022