• Keep NEUTRAL, new MYR0.73 TP from MYR0.77, 7% upside, 4% yield. 1QFY24 (Jun) core earnings met our and Street’s expectations. While we like Berjaya Food due to Starbuck’s well-established brand equity and extensive retail presence, we opt not to stretch our valuation further. This is given the cautious consumer sentiment amidst heightened inflationary pressures and recent consumer boycott actions.

• Within estimates. 1QFY24’s MYR19.3m core profit (-43.4% YoY) met 21.4% and 20% of our and Street’s full-year forecasts (in line with expectations) due to the seasonally soft quarter (absence of major festivals and lengthy holidays). A share dividend based on one treasury share for every 100 existing ordinary shares held was declared (goes ex on 13 Dec).

• Results review. YoY, 1QFY24 revenue dipped 1.6% to MYR278.5m despite the opening of new Starbucks stores (+42 to a total of 405 stores) on subdued consumer sentiment while 1QFY23 was at a high base, spurred by the economic reopening and special Employees Provident Fund withdrawals. 1QFY24 EBIT margin slipped 6.4ppts to 13.3% on higher raw materials and operating costs. QoQ, 1QFY24 sales rose marginally by 2.5% thanks to new store openings. Consequently, 1QFY24 core profit increased by 1.2% QoQ to MYR19.3m.

• Outlook. Notwithstanding the improved seasonality of 4QCY23 due to the year-end festive season, we believe the recent consumer boycott arising from the Israel-Hamas conflict is likely to affect Starbucks' near-term sales. This is due to the latter’s products being largely discretionary in nature. The competitive nature of the industry, where alternatives are easily available, is also an issue. With the current soft consumer sentiment and outlet expansion plans, we expect BFD to be more aggressive in marketing initiatives and promotions to spur consumer spending. Looking beyond the near term, outlet expansions (FY24 target: 40-50 stores) remain the key growth driver, as BFD continues to tap into opportunities in rural areas and encompass a variety of store formats to meet consumer demand.

• Forecast and ratings. As highlighted in our previous sector update report, BFD’s sales were largely unaffected by past boycotts. Nonetheless, we think the severity of current boycott could be greater due to the higher intensity of the war. We cut our FY24F earnings by 6.3% (assuming a 3- month boycott impact and c.10% reduction in average sales per Starbucks store in 2QFY23 – in line with the c.10% softer-than-average sales trend during the Ramadan period) while keeping our FY25F-26F earnings unchanged. We note that there may be further upsides/downsides depending on the boycott’s length (Figure 2). Our DCF-derived TP is slightly lowered to MYR0.73 (inclusive of a 4% ESG premium based on an ESG score of 3.2), which implies 15.3x FY24F P/E or close to its 5-year mean. Key upside/downside risks: Stronger-/weaker-than-expected consumer sentiment and higher-/lower-than-expected margins. 

Source: RHB Securities Research - 16 Nov 2023