Annual Starbucks outlet opening seen to drive BFood profit

Berjaya Food Bhd (Oct 2, RM1.44) Maintain buy with an unchanged target price (TP) of RM1.85: We met with Berjaya Food Bhd (BFood) and came away feeling neutral about the group’s prospects going forward. BFood shared that Starbucks had recently been made available for sale on GrabFood platform. With approximately 50 stores on the platform, this makes up one in six operational Starbucks outlets, as BFood currently has 300 operational Starbucks outlets. While we understand that orders generated through the platform have thinner margins than orders sold in store (as Grab takes a cut of up to 25% of the sale), we are positive on this venture as we estimate that this venture could add between 5-10% of sales volume for outlets listed on the platform.

Kenny Rogers Roasters (KRR) will continue to close unprofitable large format stores and open small format outlets instead. Since the closure of KRR in SkyAvenue (Genting), BFood has closed a further three unprofitable stores in the first quarter of 2020. In its financial year 2020 (FY20), BFood intends to open 10 more KRR outlets, with just two of those being regular format stores and the remaining eight being small format ones. We note that small format store requires just a fifth of the capex requirements of regular store’s start-up cost given the smaller real estate required in addition to lower rent. This is due to small format store having minimal seating area as it focuses on takeaway transactions.

We expect the group’s high effective tax rate of approximately 40% to remain for the foreseeable future. We understand that this is due to: i) a large chunk of the group’s interest cost being non-tax deductible as the borrowings are held at the holding company level (which were for funding the acquisition of the remaining 50% stake in Starbucks Malaysia operations); as well as ii) much of the renovation costs for Starbucks outlets being non-tax deductible.

We believe BFood’s profitability will continue to be driven by the opening of 25-30 new Starbucks outlets annually. Despite posting wide earnings before interest and tax (Ebit) losses of RM12.4 million in the cumulative 14-month FY19, we expect KRR Malaysia to narrow this in FY20 as we understand the bulk of the losses stemmed from one-off expenses associated with the closure of non-performing stores. Going forward, we expect BFood to continue to roll out small format outlets which have been successful for the group in recent times.

We keep our “buy” call and TP of RM1.85 based on an unchanged 25 times price-earnings ratio tagged to FY20 earnings per share of 7.4 sen. While we are optimistic about the KRR business strategy of closing high rent locations in favour of small format stores, BFood’s key value comes from the robust growth of Starbucks Malaysia, which we expect to continue to open 25-30 stores per annum. — Hong Leong Investment Bank Research, Oct 2

Source: TheEdgeMarkets