This article first appeared in The Edge Malaysia Weekly on December 18, 2017 - December 24, 2017

BERJAYA Food Bhd (BFood), the operator of the Starbucks coffee chain in Malaysia and Brunei and Kenny Rogers Roasters (KRR) in Malaysia, aims to turn around the latter by its financial year ending April 30, 2018 (FY2018). The KRR business chain is loss-making.

BFood’s new chief executive, Sydney Quays, has taken three steps to address some of the operational issues plaguing KRR, such as its menu and service standard. Before his latest appointment, Quays was with Berjaya Corp Bhd — which owns 43.2% of BFood — for 19 years and was instrumental in setting up Starbucks in Malaysia.

“I found that to bring BFood forward, we needed to build up KRR. We needed to turn it around. Last year, we lost a little bit of money for the first time. The goal is to revamp KRR, relook at the whole business,” he tells The Edge in an exclusive interview.

“Second is to dispose of our non-performing business, which is our overseas business. Lastly is to rationalise our loans and tax structure.”

The non-performing overseas business has already been disposed of — BFood sold its Indonesian unit, PT Boga Lestari Sentosa Indonesia, on Nov 24 for a nominal sum of IDR1,000 or 32 sen.

Part of the consideration is for the vendors to settle PT Boga’s inter-company debt to BFood amounting to RM3.1 million. The disposal will also remove the drag on BFood’s financial performance as PT Boga has been losing money for a number of years now, says Quays.

According to BFood, the nominal consideration for the disposal was arrived at on a willing seller-willing buyer basis after taking into account past yearly losses and the IDR114.65 billion (about RM36.75 million) deficit in PT Boga’s shareholders’ funds as at Aug 31.

PT Boga was incorporated in Indonesia on June 9, 2005, and has an issued share capital of IDR127.61 billion, or about RM40.9 million. BFood’s original investment in the company is RM33.98 million.

With the disposal of KRR’s unprofitable Indonesian business, BFood’s corporate tax structure will also be improved, says Quays. “PT Boga has been losing money for quite a while. We have lost close to RM37 million over the course of our operation, so it makes sense for us to let it go. We’ve been trying to sell it for a while and we have finally managed to do it.”

However, the disposal will give rise to impairment, which will be realised in the third quarter ending Jan 31, 2018 (3QFY2018), according to Quays. Based on BFood’s first-quarter results ended July 31, 2017, the disposal would result in a loss of about RM13.27 million or 3.53 sen per share.

“From all aspects, we hope to be profitable this financial year, and to do that, we need to grow. Therefore, we need to expand our stores. The only way you can generate revenue is by growing the business.

“With the growth we have in the pipeline, I don’t think the losses will widen. In fact, it will help the company turn around faster,” says Quays. KRR has three new restaurants in the pipeline that are slated to open over the next four months. Capital expenditure per restaurant is an average of RM800,000 to RM900,000.

The KRR brand is owned by Berjaya Corp, which oversees the global operation of the casual dining restaurant. After the disposal of the Indonesian business, BFood is only running the Malaysian operation. There are 82 KRR restaurants in Malaysia at present.

Besides revamping its menu, KRR has also reduced its prices with the cheapest meal now costing RM13.90 compared with about RM30 before. Customer response to the new menu has been excellent, Quays says, adding that as a result, the company has seen transactions increase 22% since June.

“KRR actually has a very loyal following of customers. The challenge is that after a while, they moved on because we didn’t have a lot of new things. Now that we have revamped the menu and the brand, our customers are coming back,” he observes.

A new service concept has also been introduced at KRR, starting off with the restaurant in Genting Skyway. Instead of serving at the table, the concept now is a walk-through, which changes KRR into a fast-casual restaurant.

Quays says this concept has worked very well for KRR and will be expanded to the new restaurants.

In its first half ended Oct 31 (1HFY2018), BFood’s Malaysian operation generated revenue of RM292.17 million, up 11.7% from the previous corresponding period. KRR contributed 20% to 25% to the revenue, says Quays.

The Malaysian business accounted for RM29.5 million of BFood’s profit in 1HFY2018 as its operations in other countries were still loss-making as at Oct 31.

KRR’s Malaysian operation recorded a RM4.2 million loss before tax in FY2017, tumbling from a pre-tax profit of RM2.5 million in FY2016 due mainly to increased competition and weak consumer sentiment.

Since KRR is in the red, it is safe to say that BFood’s only profitable business is the Starbucks coffee chain in Malaysia and Brunei. BFood’s Singapore operation — Jollibean — was also making losses as at Oct 31.

As the business is profitable, Starbucks Malaysia will open between 25 and 30 outlets every year over the next five years. There are now 252 Starbucks outlets in Malaysia and four in Brunei.

Given an average capex of RM900,000 per store and the average number of new openings a year being 25 for Starbucks and six for KRR, BFood is looking at about RM28 million a year as its base capex.

“We will open between 25 and 30 Starbucks outlets a year and we have already opened half that for this financial year. Last year, we opened 28 outlets,” says Quays.

As at Oct 31, BFood had RM17.5 million in cash and cash equivalents while its short-term bank borrowings stood at RM153.2 million. Its total debt amounted to RM256.78 million while its total assets stood at RM805.58 million, resulting in a debt-to-assets ratio of 0.32 times.

In the last 12 months, BFood’s share price has risen 18.25% to RM1.73 per share as at last Thursday, giving the group a market capitalisation of RM650.3 million.

So far in FY2018, BFood has declared interim dividends of two sen per share, which translates into a yield of 1.16% based on the latest share price. In FY2017, it had declared an interim dividend of 3.5 sen per share.

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