Investment Merits

• Consistent solid performance by Starbucks

• Efforts being put in to reduce earnings drag from KRR

• Potential re-rating if KRR is disposed

Company Profile

Berjaya Food develops and operates the Kenny Rogers Roasters restaurant chain as well as Starbucks Coffee café chain in Malaysia and other Southeast Asian countries. The company also develops and operates Jollibean Foods, which consists of Jollibean, Kopi Alley, Sushi Deli and DanGo brand in Singapore and Malaysia.

Highlights

Starbucks to continue shining. Prices of Starbucks’ products were raised by 8-9% in January, as a measure to pass through higher costs primarily arising from unfavourable forex movements. This, together with plans to open c.25 stores per year and forecasted SSSG of 4-7% pa for FY17F-19F, are expected to result in the coffee chain continue being the main pillar driving the group’s growth moving forward.

Turning KRR around. Management is also working towards rationalising KRR both in Indonesia and Malaysia. New promotional strategies have been implemented to reach out to consumers while non-performing outlets have been lined up for closure. As such, we expect the earnings drag from KRR to be reduced gradually with these measures in place.

Potential re-rating as pure Starbucks play. As KRR remains uninspiring in terms of performance and may require strenuous effort to be turned around, a disposal would not be surprising, in our view. Should a disposal at a reasonable price materialise, we believe it would be earnings accretive and could potentially be a re-rating catalyst for BFood as a pure Starbucks play. Starbucks Corp (SBUX US, NR) is currently trading at a forward P/E of 27x in the US (source: Bloomberg).

Company Report Card

Latest results. 9MFY17 (Apr) core net profit of MYR14.7m was 25.4% lower YoY, dragged down by losses in KRR Malaysia and Indonesia. During the same period, revenue grew 9.4% to MYR454.0m, thanks to aggressive Starbucks outlet expansion.

Balance sheet / Cash flow. As of 9MFY17, net gearing stood at 0.59x, with the bulk of borrowings associated with the acquisition of a 50% stake in Starbucks Malaysia in Sep 2014.

ROE. We forecast the group to deliver double-digit ROEs in FY18F-19F, driven by projected solid performance at Starbucks.

Dividend. Dividend payout is forecasted at 4/6/7 sen in FY17F-19F (yields of 2-4%), as we believe capex commitments for store expansion and efforts in paring down borrowings may restrain more generous payouts in the near term.

Management. The group is helmed by CEO, Dato’ Francis Lee, who has been with the Berjaya Group since 1994. He was the key person who turned KRR’s business around in Malaysia when it was on the verge of collapse in 1998.

Recommendation

BUY with TP of MYR2.21. We continue to like BFood – our investment case is based on the robust growth at Starbucks, which should propel BFood to register earnings growth of 17%/54% over the next two years. Meanwhile, the potential disposal of KRR, if it happens, should provide an immediate boost to BFood’s earnings in our view, after removing projected losses at the division. We value BFood with a DCF-derived (WACC: 7.4%, TG: 1%) TP of MYR2.21, which implies FY18F P/E of 21.9x, below its 5-year average forward P/E of 28.1x. BUY maintained.

Source: RHB Securities Research - 5 May 2017