KFC Holdings (M) - Not "So Good"

KFC’s 1HFY12 results were below consensus but within our estimates. We deem results in line as 1H is generally weaker than 2H. Revenue grew by a decent 10.2% y-o-y to RM1,470.9m, largely bolstered by better performance across all segments. Nonetheless, earnings declined by 16.8% due to losses in the group’s integrated poultry, education, ancillary and KFC India operations. Meanwhile, EBIT margin was eroded by higher overheads and commodity prices. Maintain NEUTRAL, with FV of RM4.00.

Not “So Good”. The group’s 1HFY12 topline expanded by 10.2% from RM1,334.3m to RM1,470.9m due to healthy revenue growth across all segments. Sales in Malaysia grew 9.9% while overseas sales jumped 11.8% y-o-y. The restaurants segment registered a 9.1% growth y-o-y, largely buoyed by expansion via new restaurants, refurbishment and remodelling of existing outlets, the introduction of new products and the launching of marketing programmes. Revenue in the education and integrated poultry segments grew by a whopping 250% and 16.3% y-o-y respectively, while ancillary revenue continued to be lower by 6% y-o-y. However, PBT and earnings dropped 16.5% and 16.8% respectively due to losses in integrated poultry, education, ancillary and the group’s KFC India operations.

Lower margin. EBIT margin dipped 1.8 ppts to 6.3% y-o-y as higher overheads and costlier raw materials bit into margins. Margin in the restaurant segment was dragged down by higher food costs, operating expenses and heavier media buys in conjunction with the “So Good” campaign. Meanwhile, the integrated poultry segment was hit by recurring losses at its Kedai Ayamas retail outlets and thinner profit margins from open market sales, while margins in both the education and ancillary segments were affected by higher overheads. Going forward, we expect flat or lower margins due to the stubbornly high commodity prices and heavier operating expenses.

Maintain NEUTRAL. KFC is trying to sustain its earnings momentum by: i) aggressively driving topline growth with new innovative products, and ii) embarking on value promotions and investing in thematic advertising on its brands to reinforce its superior product image. Maintain NEUTRAL, and our FV of RM4.00, based on the proposed takeover offer price.

Source: OSK