Starbucks ops expected to remain Bfood’s major profit driver

This article first appeared in The Edge Financial Daily, on February 11, 2019.
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Berjaya Food Bhd
(Feb 8, RM1.36)
Maintain add with a higher target price (TP) of RM1.91:
As part of an ongoing revamp of Kenny Rogers Roasters’ (KRR) operations, Berjaya Food Bhd (BFood) will be focusing on reorganising the former’s menu, which in our view could help drive transaction volumes.

We expect the KRR operations to break even at the earnings before interest and tax level by end-2019 forecast (-FY4/19F), after recording a pre-tax loss of RM6.7 million in financial year 2018 (FY18).

We expect KRR to open a net of seven stores for FY20F (2QFY4/19: net - 6 stores).

BFood’s Starbucks business remains its major earnings driver, as one of the most popular coffee chains in Malaysia.

BFood plans to open 25 to 30 Starbucks stores in FY19 (it added 21 net new stores in FY18).

BFood is also looking to increase the number of Starbucks drive-through outlets, which we understand cost less in rental expense as a percentage of revenue.

Jollibean recently introduced a new soy bean drink, under the Joybean brand, currently distributed at 7-Eleven stores and a few high-end grocery outlets.

We’ve also gathered that Jollibean had garnered franchisee interest from companies in India, the Philippines, the Maldives and Singapore to open outlets.

However, we do not expect a significant contribution from the franchise proceeds, and only expect contribution to be realised from FY20.

We cut our FY19 to FY21 forecast earnings per share estimates by 4.1% to 4.9%, mainly to factor in increased interest costs from higher borrowings to fund the capital expenditure requirements.

Nonetheless, we still forecast a strong FY19 core earnings growth of 28.3%, driven by Starbucks business’ continued strong performance and narrowing losses for KRR.

We have also increased our capex assumptions to RM80 million per year, from RM40 million previously, with most of the amount allocated for Starbucks’ expansion.

We retained our “add” rating with a higher TP of RM1.91, based on a 24 times calendar year 2020 forecast price-to-earnings (P/E) ratio versus 20 times previously, in line with its five-year historical mean P/E, from a three-year mean previously, to better capture growth prospects.

Downside risks include intensifying competition and a slower Starbucks and KRR same-store sales growth. — CGSCIMB Research, Feb 7