Berjaya Food - Poised for rapid expansion, but upside limited HOLD

- We are downgrading Berjaya Food (BFood) to a HOLD, with an unchanged fair value of RM1.45/share pegged to a 13x PE on CY13F earnings, given a limited potential upside. The share price has performed well (+39% since our initiation report on 25 May 2012). Earnings trajectory remains strong, supported by a greater certainty in growth as its expansion spree remains well on track and on the impending acquisition of Starbucks which would lift its earnings portfolio.

- To-date, Kenny Rogers Roasters (KRR) restaurants number 88 – 77 in Malaysia (BFood-owned: 67; franchisee-owned: 10) and 11 in Indonesia. Same store sales (SSS) growth for FY12 was at 8%. In FY13F, three new restaurants (Paradigm, Setia City Mall, Shaftsbury Square) opened in the first quarter, with another six in the pipeline for Malaysia. BFood is on a lookout for six more locations to achieve its target of 15 new outlets p.a.

- Similarly, BFood has set up three KRR outlets in Jakarta. Eight locations have been confirmed (4 in Medan; 4 in Surabaya). Management expects it to break even once it exceeds 20 outlets by FY13. We have revised upwards our earnings forecasts by 2-3% for FY14F-FY15F based on a conservative stance that each restaurant generates circa RM600k-RM900k in revenue.

- It is a positive that BFood’s expansion spree will  take off smoothly in Malaysia and Indonesia, given the plentiful opportunities particularly in the urban areas. Elsewhere, BFood is in preliminary talks to develop KRR in the Middle East, namely in Qatar.

- BFood will be launching its first drive-through service in the upcoming standalones in Setia Tropika and Kota Kemuning within 6-9 months. Nevertheless, expansion remains focused on retail malls and subsequently, branching into standalones. Additionally, management is gradually growing the delivery, Roasters On The Move (mobile restaurant) and catering segments (<10% of revenue) via active marketing and advertising. 

- Average ticket size for KRR is circa RM40 – equivalent to Pizza Hut. Despite a larger average ticket size compared to fast food chains (McDonalds, KFC), circa RM15, we reckon that it is unlikely to affect KRR’s business model as it targets the niche market – middle-income consumers – and advocates a well-balanced eating lifestyle.

- The proposed acquisition of a 50% stake in Berjaya Starbucks is expected to be completed by early August. Starbucks achieved SSS growth of 26% in the last six months – the highest within Southeast Asia. 

- Starbucks in Taman Tun Dr Ismail has a different concept, consisting of three storeys, where two conference rooms occupy the third floor priced at RM50/hour per room. This is the first such concept  outlet in Malaysia. Nonetheless, depending on the suitability of location, BFood is unlikely to open another Starbucks of a similar concept, moving forward. 

- More importantly, earnings are on an upward trend,  accompanied by a growing number of restaurants, improved product offerings and higher margins from a new menu. Not forgetting, earnings are expected to rise further from the proposed acquisition of Starbucks. Given the strong franchise value, earnings CAGR of 51% remains robust over FY13F-FY15F

Source: AmeSecurities