• D/G to NEUTRAL from Buy, new MYR0.77 TP from MYR1.29, 7% downside with 4% FY23F (Jun) yield. Berjaya Food’s 9MFY23 core earnings are lower than expected, primarily due to cost pressures. We cut our stock rating in view of its negative FY24F earnings growth, on normalised margins and a high FY23F base, on top of possibly still-soft consumer spending ahead. That said, we believe the aforementioned weakness may be in the price, and its current valuation is fair – in light of its strong Starbucks brand equity and robust expansion plan.

• Results are below expectations. BFD’s 9MFY23 core profit of MYR83.3m (-2.8% YoY) met only 66% and 61% of our and consensus full-year forecasts, due to higher-than-expected costs and weaker-than-expected consumer sentiment. A DPS of 0.5 sen was declared (3QFY22: 1.5 sen) and will go ex on 8 Jun.

• Results review. YoY, 9MFY23 sales rose 19.5% to MYR844.2m, mainly driven by contributions from new Starbucks stores (+c.35 to total of 379 stores) on the back of the economic reopening. However, 9MFY23 EBIT margin slipped 4 ppts to 17.1%, on higher raw material and staffing costs, as well as normalised rental expenses. 3QFY23 sales declined by 10% QoQ to MYR265.8m on weaker seasonality and the impact of the fasting month. This, together with higher expenses arising from input and staff costs, dragged 3QFY23 core earnings by 50.6% QoQ to MYR16.3m.

• Outlook. We are not expecting a significant improvement in 4QFY23, considering the more meaningful impact of Ramadan but the Aidil Fitri festive season sales should partially offset the shortfall. Further ahead, we expect FY24 earnings to reflect normalised margins on the back of a higher cost base. Also, consumer spending could soften further, considering the elevated inflationary pressure and rising interest rates environment. On the flip side, BFD’s robust expansion of its Starbucks network (c.25 new stores in FY24F) should continue to underpin growth, whilst easing input costs and an increase in tourist arrivals should also help to alleviate margin pressure.

• Forecasts and ratings. We cut FY23-25F earnings by 19-32%, taking into account the higher cost base and cautious consumer spending. Our DCF- derived TP has also been adjusted to MYR0.77, with a 3% ESG premium baked in – as BFD’s ESG score of 3.15 is above the country median. Our TP implies 15.3x FY24F P/E (in line with its 5-year mean). Key upside/downside risks include stronger/weaker-than-expected consumer sentiment and higher/lower-than-expected margins.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 19 May 2023