KFC (FV RM4.00 - NEUTRAL) FY11 Results Review: Not so "Finger Lickin' Good"

KFC’s  full year earnings were below consensus but within our estimates. The stronger revenue (+11%) was attributed to better performance across all segments but its core net profit fell 4.1% y-o-y due to higher operating expenses. EBIT margin continue to shrink, dipping by 0.8% on costlier input and higher expansion expenditure. Maintain NEUTRAL, with our FV unchanged at RM4.00.

In line.  KFC’s  FY11 revenue jumped 11% y-o-y from RM2.5bn to RM2.8bn, largely contributed by higher revenue from its Malaysia and overseas operations. The opening of 24 new restaurants, introduction of new products and effective marketing programs boosted revenue at its Malaysian operations (+10.6%) while revenue from its overseas operations improved 14.9% y-o-y to RM449.4m from RM391m previously. Revenue in the integrated poultry and ancillary segments grew by 10% and 2.9% respectively while revenue at the education division soared 327% y-o-y. The FY11 PBT was lower than that in the previous year, during which  KFC recorded a net surplus of RM6.7m from revaluation of properties. Excluding the exceptional gain, the group’s PBT was still flat at RM121.5m vs RM121.1m y-o-y given expenses from new openings and higher raw material costs. Despite the flat PBT, core net profit was lower by 4.1% y-o-y due to  a higher tax rate. Q-o-q, the group’s top- and bottom-lines expanded by 9.9% and 13.4% respectively, spurred by the holiday and festive seasons.

Leaner margin.  EBIT margin slipped 0.8% from 8.7% to 7.9%, with the integrated poultry and education segments being the major drags. The thinner margins from integrated poultry were mainly due to: i) the higher commodity prices in producing feed for broiler farming, ii) higher energy and storage costs, and iii) higher cost to buy broilers from the open market to meet the increasing demand from its Malaysian operation. The higher operating expenses incurred in setting up its new campuses in Johor and Selangor and higher marketing cost to boost student intake  also  played a part  in chipping off margins in the education division.

Maintain  NEUTRAL.  We remain cautious on KFC’s prospects in light of a recent incident caught on  Youtube purportedly  depicting unruly behaviour among KFC employees. This  may dampen customer sentiment for  the time being. Maintain NEUTRAL, with our FV at RM4.00, based on the takeover offer price.

Source: OSK188