Berjaya Food Bhd
(Sept 4, RM1.40)
Maintain buy with a lower fair value (FV) of RM2.01: We maintain our “buy” call on Berjaya Food Bhd (BFood) with a lower FV of RM2.01 (from RM2.17) after trimming financial year 2019 (FY19) and FY20 earnings forecasts by 22% and 29%, respectively. We have factored in lower margin assumptions and higher gestation costs.
We are neutral on BFood following our meeting with its management. While we are positive about the growth of Starbucks Malaysia and the expansion plans that are slated for BFood’s segments, we are wary of its ability to turn around the loss-making segments, which have weighed down earnings in recent years.
Starbucks Malaysia makes up about 79% of total revenue, and BFood is planning to open 25 to 30 new Starbucks stores. Out of these, about 13 will be drive-through stores, two reserved stores, and the rest will be core stores. As of now, there are a total of 39 drive-through stores, seven reserved stores, and over 200 core stores. Additionally, BFood plans to open 50 Starbucks kiosks at Petronas petrol stations as part of their partnership. We are positive about this as the drive-through stores rake in the highest margin, followed by the core stores and the reserved stores.
Coffee beans account for some 8% of Starbucks’ total cost of sales. Coffee bean prices have been falling since second quarter of calendar year 2018 though these were slightly offset by the weakening ringgit against the US dollar. Our sensitivity analysis suggests that a 5% decline in the price of coffee beans will improve Starbucks’ profit before tax (PBT) margin by 0.2 percentage point, resulting in a 2% increase in PBT. In FY19, we expect Starbucks’ same-store-sales growth to continue at about 1.9% and we estimate a 14% rise in Starbucks’ gross profit.
Kenny Rogers Roasters (KRR) contributes to about 15% of total revenue. The group closed down three KRR restaurants in the first quarter of FY19 but plans to open two new KRR restaurants and four KRR express outlets in FY19. BFood has also revamped the management of KRR to improve internal efficiency to facilitate its turnaround. Although we opine that BFood has the ability to reduce the loss of KRR’s current operations, the opening of new KRR stores may incur additional costs, which will affect the group’s bottom line. Moving forward, we expect KRR’s loss before tax to narrow to RM1.8 million (versus loss of RM6.7 million in FY18).
BFood closed down one Jollibean Singapore store in first half of FY19 (1HFY19) but plans to open six new kiosks on top of its current 31 kiosks. Management has also recently revitalised the brand and now offers new products. BFood will offer Jollibean for franchising although contribution from this is expected to be minimal. — AmInvestment Bank, Sept 4