Berjaya Food Bhd
(Sept 12, RM3.09)
Downgrade to hold from buy with target price (TP) of RM3.05: We are downgrading Berjaya Food (BFood) from “buy” to “hold”, with a higher TP of RM3.05 per share (versus RM2.50 per share previously), pegged to a higher price-earnings (PE) multiple of 25x fully-diluted CY15F earnings — a justified premium over its peers, following earnings accretion of Berjaya Starbucks Coffee Sdn Bhd (BStarbucks).

We have raised our earnings by 7% to 8% over FY15F to FY17F to reflect stronger same-store sales growth (SSSG) of 12% compared to our previous conservative SSSG assumption of 10%. BStarbucks achieved 16% SSSG in FY14.

We expect earnings to increase phenomenally by 50% in FY15F due to an enlarged earnings base following five months of equity accounting (50% stake) and seven months of contribution from a fully-consolidated BStarbucks (100% stake).

While its valuation is high based on an FY15F PE of 31x, FY16F will reflect a full-year contribution from the full consolidation of BStarbucks, its high growth segment. Acquisition of the remaining 50% equity interest in BStarbucks is on track to be completed by this month.

Notwithstanding our downgrade recommendation, we remain positive on BFood’s high growth earnings trajectory in the medium- to longer-term, following its steep share price increase.

Expansion continues to be on a solid footing underpinned by its solid brand name and growing franchise value.

Notably, post acquisition, Starbucks will be the key revenue driver, contributing 71% of revenue on a fully consolidated basis. Given Starbucks’ underlying strong franchise value, we see expansion potential in untapped outskirt areas.

It is interesting to note that BStarbucks’ outlet expansion

will still be subject to the master franchiser’s approval.

A key wild card would be fast-moving consumer goods for Starbucks; we believe that this would materialise in the near- to medium-term, with potential acquisitions in the food and beverage space.

The key risk to our earnings projections are: (i) expectations of a slowdown in consumption spend, (ii) strengthening of the US dollar and (iii) higher food costs.

The group’s first quarter of financial year 2015 (1QFY15) results are due for release today.

At the current levels, the stock is trading at a forward PE of 31x, which is at the higher end of its PE band. — AmResearch, Sept 12
 

This article first appeared in The Edge Financial Daily, on September 15, 2014.