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This article first appeared in The Edge Financial Daily on June 25, 2018

Berjaya Food Bhd
(June 22, RM1.62)
Maintain hold with a lower target price of RM1.74:
Berjaya Food Bhd (BFood) reported a turnover of RM160 million, up 5.7% year-on-year (y-o-y), while core net profit surged 50% y-o-y to RM2.4 million for its fourth quarter of financial year 2018 (4QFY18). This brought its full-year FY18 core net profit to RM19.3 million — after stripping out one-off RM15.3 million loss from the disposal of Kenny Rogers Roasters (KRR) Indonesia — which disappointed both our and Bloomberg consensus expectations, at 93% and 87% of the respective forecasts. The earnings shortfall was mainly due to weaker-than-expected profit from KRR Malaysia.

All in, BFood’s FY18 sales rose 5.6% to RM639.6 million and core net profit rose 9.4% y-o-y to RM18.6 million. The group’s turnover growth was mainly driven by an improved performance from Starbucks Malaysia (+19 net new stores in FY18). Accordingly, the group’s higher profitability was lifted by a narrower loss from KRR Indonesia (FY18 pre-tax loss of RM2 million versus FY17 pre-tax loss of RM9.3 million) due to the latter’s disposal, and higher reported profit from Starbucks. FY18 pre-tax profit margin expanded 0.8 percentage points y-o-y to 5.8%.

On a y-o-y basis, 4QFY18 revenue growth was supported by higher sales from Starbucks on the back of higher store openings. Accordingly, the group’s core pre-tax profit (after stripping out write-down on property, plant, and equipment amounting to RM1.6 million) increased 26% y-o-y as a result of a higher contribution from Starbucks Malaysia, coupled with the shaving off of KRR Indonesia loss for the quarter under review (4QFY17 pre-tax loss: RM4 million). The group announced a final dividend per share (DPS) of one sen, bringing FY18 DPS to four sen (FY17 DPS: 3.5 sen), which met expectations.

Looking ahead, we believe the group’s core franchise, Starbucks Malaysia, will continue to sustain its earnings growth on the back of continued store openings (25 to 30 stores per year) and by the progressive earnings recovery from KRR Malaysia as it hones its product offerings and offers lower meal prices to attract more consumers. The uplift in consumer sentiment and spending from the removal of the goods and services tax should also help boost the demand for its products, in our view.

Following the release of the group’s full-year results, we adjust our FY19-FY20 earnings per share (EPS) forecast by +1% to -1.2% and introduce our FY21 forecast. Our end-2018 target price is adjusted to RM1.74, still based on 22 times to 2019 price-earnings ratio forecast (in line with its five-year historical mean). We retain our “hold” call as we think its current valuation fairly reflects the positives from the disposal of its key earnings drag, KRR Indonesia, and the continued earnings growth from Starbucks. — CGSCIMB Research, June 22

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