• Maintain BUY and DCF-based MYR1.29 TP, 29% upside with c.4% yield. We hosted a meeting with Berjaya Food’s CFO Louise Chin, and came away feeling positive on its sustained earnings momentum – driven by a robust expansion plan, strategic marketing efforts and an improved product mix. BFD is trading at an attractive 13.6x FY24F P/E (below industry average) – in view of Starbucks’ strong retail network in Malaysia, supported by its established brand equity and unmatched market positioning.

• Extensive retail presence. BFD now has 376 Starbucks store (c.20% are drive-through concept outlets), and is targeting to expand its network by an additional 35-40 stores in 2023 in high-traffic areas. Capex for each store ranges MYR1.1-2m, depending on the size and format. Additionally, we gathered from management that the drive-through outlets – which typically carry a higher average transaction size – have a shorter payback period vs normal outlets. Nevertheless, drive-through outlets are not easily available due to the longer set-up time and necessary approvals from the authority. Elsewhere, we expect Kenny Rogers Roasters (KRR) to remain profitable – even though margins were slightly squeezed by higher material costs due to the hike in chicken prices.

• Paris Baguette (PB) received an overwhelming response since its debut, and the payback period could be within a year if the sales momentum is sustained. Moving forward, management is targeting to open five outlets (capex: MYR2m per store) every year, while continuing to expand the capacity for its central kitchen (capex: MYR2-3m per kitchen). Management shared that capex requirement for Paris Baguette outlet is higher than that for Starbucks. Earnings contributions from PB should be muted at this stage, considering the pace of its expansion and the fact that it is a JV.

• Outlook. Management remains aware of pressures stemming from rising inflation and the normalisation of rental rates and wages – which could pose further margin shrinkage. Nevertheless, it is confident of achieving commendable SSSG this year, driven by new product launches and marketing engagement on top of the higher ASPs (c.6% price hike in Dec 2022). Also, management believes that the various measures proposed in the re-tabled Budget 2023 to support consumer spending also bodes well for the company. These would be further complemented by the return of China tourists, which should boost footfall to retail areas.

• We maintain our estimates, while our unchanged DCF-derived MYR1.29 TP implies 17.4x FY24F P/E (+1.5SD from the mean). This is largely in line with the valuations of other consumer discretionary counters under our coverage. We also ascribe a 2% ESG premium on BFD’s intrinsic value to derive our TP, as BFood’s ESG score of 3.1 is higher than the country median. Key downside risks: Weaker-than-expected consumer sentiment and a drag in the expansion of BFD’s brands.

Source: RHB Research - 10 Mar 2023