This article first appeared in The Edge Financial Daily on June 17, 2019

Berjaya Food Bhd
(June 14, RM1.68)
Maintain buy with a lower target price (TP) of RM2: Berjaya Food Bhd’s (BFood) core profit after tax and minority interest (Patmi) for the 12-month period ended April 30, 2019 (12MFY19) of RM26.3 million (+58.9% year-on-year [y-o-y]) was below expectations, accounting for just 88.3% and 90.1% of our and consensus 12MFY19 forecasts, respectively.

The poorer-than-expected results were due to earnings before interest and tax (Ebit) losses from Kenny Rogers Roasters (KRR) Malaysia of RM2.6 million. Note that BFood recently announced the change in its financial year end (FYE) from April to June.

As such, there will be a fifth quarter (5Q) results of two months (that is May and June) that will be announced for financial year 2019 (FY19) (14M FYE).

Declared dividend per share of one sen (4QFY18: one sen) going ex on July 10, taking year-to-date (YTD) dividend to four sen (12MFY18: 4 sen) per share.

Quarter-on-quarter (q-o-q) revenue declined 5.9% and higher effective tax rate resulted in core Patmi declining 54.9%.

Note that 3Q is typically the strongest quarter, as the festive period, heightened tourist arrivals and school holidays often result in robust sales numbers.

As such, although lower sales in 4Q were expected, the magnitude of its q-o-q earnings decline was a negative surprise due to KKR Malaysia reverting to red.

Year-on-year (y-o-y) sales grew to RM169.9 million (+6.2%) driven opening of additional Starbucks outlets as well as positive same-store-sales (SSSG) in both Starbucks (+1%) and KRR Malaysia (+1.4%) operations.

Meanwhile, bottom line more than quadrupled as KRR Malaysia posted narrower Ebit losses of RM2.6 million (versus Ebit loss of RM4.2 million in 4QFY18).

YTD revenue growth of 6.1% was predominantly due to opening of additional Starbucks outlets and SSSG of +4%. Core Patmi swelled 58.9% to RM26.3 million due the higher sales from Starbucks and absence of losses from KRR Indonesia operations, which were disposed of in FY18.

We believe BFood’s profitability will continue to be driven the opening of 25 to 30 new Starbucks outlets annually. Despite posting Ebit losses of RM2.6 million in 4QFY19, we expect KRR Malaysia to turn profitable in FY20 as BFood continues to tweak their menu offerings and close unprofitable stores.

Given the results shortfall from weaker KKR Malaysia operations, we lower FY19-FY21 forecasts 1.3%, 2.9% and 4% respectively.

After our earnings cut and rolling over our valuation year, our TP drops to RM2 (from RM2.05 previously), derived from an unchanged 25 times price-to-earnings ratio (PER) tagged to FY20 earnings per share (EPS) of eight sen.

Despite KRR Malaysia operations returning to the red in 4QFY19 (after being marginally profitable in 3QFY19), we still see value in Bfood which trades at 22.1 times FY20 PER. We are encouraged the robust growth performance of Starbucks Malaysia, which reported SSSG of +4% and opening of 28 outlets in FY19 so far. — Hong Leong Investment Bank Research, June 14