This article first appeared in The Edge Financial Daily on December 4, 2019
Berjaya Food Bhd
(Dec 3, RM1.38)
Maintain add with an unchanged target price (TP) of RM1.63: The Edge Malaysia weekly recently reported that Berjaya Corp Bhd (BCorp) is in talks to dispose of a substantial stake in Kenny Rogers International Corp (KRRI) to a foreign party. BCorp via KRRI owns the worldwide franchise rights for the Kenny Rogers Roasters (KRR) brand.
As at June 30, 2019, there were 183 KRR outlets in Malaysia, the Philippines, Singapore, the United Arab Emirates, India, Thailand and Kuwait. Berjaya Food Bhd (BFood), via its wholly-owned subsidiary Berjaya Roasters (M) Sdn Bhd, is the master franchisee for the KRR restaurant chain in Malaysia, and operated 77 KRR outlets as at the end of the first quarter ended Sept 30, 2019 (1QFY20).
For now, we do not see any impact on BFood’s KRR operations, as we reckoned there will be no material changes to the franchise agreement if the stake sale materialises. We believe the likelihood of an adverse change in the franchise agreement — such as higher franchisee fees, among others — is low as BCorp, the majority shareholder of BFood, is unlikely to agree to such a deal, in our view, given BFood’s KRR business was loss-making as at FY19.
We gathered that BFood remains committed to sustaining and growing its KRR business in Malaysia. After a cost consolidation over the past few years to arrest weak same-store sales growth (SSSG) and profitability, BFood is returning to expansion mode by focusing on smaller-format outlets to expand its store base. We are projecting BFood to open 10 new KRR outlets in FY20 forecasts, from a net closure of one store in FY19. We expect its cost consolidation to turn its KRR operations profitable for FY20 forecasts, on better cost-control and a more prudent store expansion.
Our earnings per share forecast is unchanged and our “add” call on BFood is retained, with an unchanged TP of RM1.63, 24 times calendar year 2021 price-earnings ratio. We still like BFood for the strong brand names under its portfolio, particularly Starbucks, and its healthy earnings prospects. Key potential rerating catalysts include a higher-than-expected Starbucks SSSG and a stronger-than-expected KRR turnaround. Downside risks to our “add” call are a weak or negative SSSG for its Starbucks and KRR operations, and higher operational costs. — CGS-CIMB Research, Dec 2