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This article first appeared in The Edge Malaysia Weekly on October 29, 2018 - November 4, 2018

WITH an initial public offering (IPO) planned sometime next year, QSR Brands (M) Holdings Bhd is returning to the local bourse bigger and as a slightly different animal.

It has embarked on a new business model that will shave off a lot of its capital expenditure requirements — by getting the developers of integrated townships to pay for the construction of its outlets.

The farm-to-fork poultry business, which holds the right to operate Kentucky Fried Chicken (KFC) restaurants in Malaysia, Singapore, Brunei and Cambodia, and Pizza Hut restaurants in Malaysia and Singapore, believes that the iconic brands help make a township more vibrant.

“We are fortunate to have such iconic brands ... They are global brands. So, for property development companies, one of the growth catalysts in their townships is having KFC or Pizza Hut outlets.

“We have done this in Bandar Sri Sendayan in Negeri Sembilan, where our presence has become an additional value proposition for the township,” says QSR managing director Datuk Seri Mohamed Azahari Mohamed Kamil in an exclusive interview with The Edge.

Bandar Sri Sendayan is an integrated township in Seremban, which was developed by Matrix Concepts Holdings Bhd.

Within the next three years, QSR plans to add 67 KFC and 60 Pizza Hut outlets across its four markets. Currently, QSR operates 810 KFC and 467 Pizza Hut outlets in these markets.

Some 698 of its KFC outlets are located in Malaysia, 85 in Singapore, 16 in Cambodia and 11 in Brunei, while the group operates 388 Pizza Hut outlets in Malaysia with the remaining 79 in Singapore.

So, how does the new business model work and what is in it for property developers?

According to Azahari, QSR will form a business partnership with the developers to build drive-through outlets in the latter’s integrated townships.

The developers will pay for the construction cost of the building, substations and other support infrastructure while QSR will contribute the kitchen machinery and appliances. The ownership of the building stays with the developer.

A drive-through outlet typically costs RM2 million to RM2.5 million to build, excluding land cost, he says.

In turn, QSR will sign a long-term lease of 25 to 30 years with the developer to operate the drive-through outlet. The lease will be renewable every three years at an attractive rate to the developers, says Azahari.

In addition to the base rent, property developers will also benefit from a staggered increase in the leasing rate. If the revenue of the outlet reaches a certain level, QSR will share a percentage of the increased revenue with the property developer, he says.

“The partnership will be such that it is not going to be a losing situation for the partners. We will make sure the base rent is competitive and gives a return of at least about 4% per annum to the developer,” says Azahari.

At the same time, the developer is assured of an exit strategy, whereby the outlet can be injected into Johor Corp’s Al-Salam Real Estate Investment Trust, subject to a yield acceptable to the REIT and Securities Commission Malaysia approval.

This business model will also include drive-through outlets at Petronas Dagangan Bhd (PDB) petrol stations, says Azahari. At the moment, almost 50 PDB petrol stations are suitable for the new business model, he says.

“We have identified 14 Petronas petrol stations that are suitable for us to build drive-through outlets based on the new business model, starting next year. The first two will be in Senawang, Negeri Sembilan and Masai, Johor, which will start operations within the next two years,” says Azahari.

At the moment, QSR operates 15 drive-through restaurants at PDB petrol stations nationwide.

Besides Matrix Concepts, QSR has also partnered MTT Properties & Development Sdn Bhd in Botanica.CT township in Balik Pulau, Penang. Azahari says more property developers will be signed on as QSR’s business partners in the coming months.
 

How has QSR grown since 2012?

The relisting of QSR, after it was taken private by the Employees Provident Fund, CVC Capital Partners and Johor Corp in 2012, will allow the international private equity fund to phase out its investment.

QSR’s top and bottom lines have grown substantially since the financial year ended Dec 31, 2011 (FY2011).

In FY2012, the group saw revenue and profit after tax of RM3.62 billion and RM158.77 million respectively. In FY2017, revenue stood at RM4.56 billion, a 26% increase over FY2011, while net profit has increased 15.86% over the years to RM183.95 million.

After delisting, QSR underwent a business streamlining processes, which included the consolidation of its KFC business from four separate entities into QSR Stores, a wholly-owned subsidiary.

The group also expanded the business, which saw the number of KFC outlets in Malaysia increase to 810 restaurants from 662 as at Dec 31, 2012. QSR had also disposed of a number of non-core businesses, including Ayamas Group and Rasamas Group, as well as 11 KFC stores in India.

QSR has embarked on an asset-light strategy by entering into sale-and-leaseback arrangements with Al-Salam REIT. The group disposed of 27 properties for a total cash consideration of RM277.9 million to the REIT and leased back all of them. There are 22 more properties pending injection into the REIT next year, worth a total of RM115 million. After the 22 outlets are injected into the REIT, QSR will only own seven outlets, says Azahari.
 

Timing of the IPO

Some market observers are questioning the timing of the listing as emerging markets are still reeling from massive capital outflows to safe havens, worries about the trade war between the US and China and the Brexit imbroglio.

On the domestic front, the change in government on May 9 and the subsequent economic policy changes at the federal level have spooked investors. The FTSE Bursa Malaysia KLCI has lost 6.13% of its value so far this year, settling at 1,686.59 points as at last Thursday.

Despite the murky outlook for the stock market, Azahari believes that there is sufficient liquidity in the market to absorb the QSR’s IPO.

“We haven’t seen any new listings (of this size) over the last 1½ years, and I know there are many hungry fund managers — locally and globally — who are looking for value stocks.

“This is a consumer-based company that has a good track record in Malaysia for the last 40 years. We believe that there is enough liquidity to absorb whatever we are offering,” says Azahari.

The IPO consists of the offering of up to 1.47 billion shares, representing 350% of QSR’s enlarged issued share capital. Johor Corp CEO Datuk Kamaruzzaman Abu Kassim was reported to have said that QSR plans to raise RM2 billion from the IPO.

The relisted company is expected to have a market capitalisation of RM6 billion, Kamaruzzaman was reported as saying. This translates into a market price of about RM1.43 per share, based on QSR’s enlarged share base of 4.188 billion shares.

At RM1.43 per share, QSR will have a valuation of 32.78 times. For comparison, its closest local peer, Berjaya Food Bhd, was trading at 20.29 times forward earnings for the financial year ending April 30, 2019. On a trailing 12-month basis, however, BFood was valued at a high 247 times.

Around the region, the Philippines’ Jollibee Foods Corp was last traded at a trailing 12 months PER of 37 times and forward PER of 36.72. PT Fast Food Indonesia Tbk was trading at a historical and forward PER of 19 and 20.9 times respectively. 

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