KFC Holdings - Non-core divisions a drag on earnings Buy

KFC Holdings (KFC) posted a higher net profit of RM38mil for 4Q, bringing full-year earnings to RM144mil. The results were 13% below our forecast and 9% short of consensus. The performance was largely marred by losses from the ancillary and education divisions which crimped margins. 

Despite an 11% top line growth for FY11, net profit fell 8% YoY. Higher sales volume was attributed mainly to:- 1) Healthy  same-store-sales (SSS) growth at an estimated mid- to high-single digit; 2) Network expansion of KFC outlets and; 3) Introduction of new product offerings. KFC added a total of 36 new outlets for FY11 (Malaysia: +24, Brunei: +3, Singapore: +3, India: +6). 

Non-core divisions of integrated poultry and education & ancillary operations fared below expectations. Higher commodity costs, namely feedstock for broiler farming activities, dragged down integrated poultry’s EBIT (YoY: -61%), while the education & ancillary division fell into the red with a RM7mil loss (FY10: 5mil) as a result of increased costs from new campus opening (Bandar Dato Onn, Johor) and higher A&P. The ancillary division, which is predominantly sauce manufacturing, was affected by reduced volumes for contract packing and higher packaging material costs.

The lacklustre performance was not surprising, given higher raw ingredients and packaging costs which escalated in 1HFY11. We are not too concerned about margin pressures moving forward, given the easing in soft commodity prices and the small contribution to group earnings at 4%-5%. As an indication, prices of corn and potato are 18%-22% off their respective peaks.

On a sequential basis, 4Q net profit was up 13% on the of a 10% rise in revenue. This was mainly attributable to seasonally robust sales at KFC restaurants from year-end school holidays and festive celebrations. 

We have trimmed our FY12F-13F earnings forecasts by7%-10% post KFC’s full-year results and our latest margin assumptions. We are keeping our projection of new KFC store openings at 36 per annum. Maintain BUY with an unchanged fair value of RM4.15/share, based on a fair PE of 18x FY13F earnings as we still like the group’s highgenerative food business model. We expect the proposed takeover of KFC by 51% Johor Corporation-owned Massive Equity Sdn Bhd (MESB) to be concluded by end-1Q2012. CVC Capital Partners Asia III Limited owns the balance of 49% of MESB.

Source: AmeSeurities