Berjaya Food - Gearing up for acquisition of Starbucks Hold

- We re-affirm our HOLD on Berjaya Food (BFood), with a revised fair value of RM1.00/share versus RM1.45/share previously – accounting for the enlarged share capital to incorporate the rights issue and warrants.  

- Our revised fair value is pegged to a target PE of 13x, based on fully-diluted CY13F earnings, which is on par to its historical mean of 13x. Peers’ average stands at 14x.

- To recap, BFood’s corporate proposal entails:- (1) Proposed acquisition of a 50% equity interest in Berjaya Starbucks Coffee for a cash consideration of RM71.8mil; and (2) Proposed renounceable rights issue of up to 118.9mil new ordinary shares together with up to 118.9mil free warrants on the basis of 4 rights issue together for 4 warrants for every 5 BFood share.

- The ex-date for the rights issue is today. The rights issue is fixed at RM0.65/share. Theoretical-ex rights price stands at RM1.08/share based on yesterday’s closing price of RM1.43/share. 

- The rights issue proceeds of up to RM77.3mil cash is allocated to fund the 50% stake acquisition in Berjaya Starbucks without having the need to resort to borrowings.

- Meanwhile, the warrants exercise price is fixed at RM0.70/share with a term up to 5 years. Theoretical-ex price (adjusted for rights and warrants) is RM0.97/share.

- The injection of Starbucks is expected to be finalised in early August. More importantly, it would bring BFood’s earnings portfolio to greater heights. Starbucks’ expansion  is ongoing, targeting 18-20 new outlets per annum. We forecast Starbucks (50%-owned) to contribute pre-tax profits of RM8mil and RM12mil in FY13F and FY14F, respectively. 

- Nonetheless, BFood earnings are on an upward trend, driven by a growing franchise value. As backed by the growing number of outlets for both Starbucks and Kenny Rogers Roaster (KRR), we are of the view that BFood’s earnings growth should gain greater traction. Furthermore, growth remains robust particularly in urban and sub-urban locations. 

- At the target PE of 13x, we maintain our HOLD rating because of a limited upside to share price. We remain bullish on BFood, underpinned by long-term prospects arising from the injection of Berjaya Starbucks and massive expansion of KRR in Malaysia and Indonesia. 

Source: AmeSecurities