Berjaya Food - Spreading the “JOLLI”-bean JOY! BUY

- We re-affirm our strong BUY conviction on Berjaya Food (BFood), with a higher fair value of RM1.55/share vs. RM1.40/share previously, following its acquisition of Singapore’s Jollibean Foods Pte Ltd (JFPL). Our fair value is pegged to 19x PE on CY13F earnings. 

- On 7 December 2012, it was announced that BFood had completed the acquisition of a 100% equity stake in JFPL for SGD7.5mil (RM19mil), representing a PE of 11.5x based on the latter’s estimated FY13 PBT of SGD0.65mil. The acquisition is value accretive, given BFood’s fully-diluted PE of 18.5x. 

- The acquisition is a positive, in our view, as it further strengthens the group’s position as a regional F&B player. Not only does the group have presence in Malaysia and Indonesia, it just made its maiden footprint into Singapore. Further out, the group plans to grow the Jollibean brand in Malaysia and China mainly be based on licensing. 

- We see exciting growth plans mapped out, backed by its growing franchise value business model and supportive operating dynamics. Management is also keen in expanding Sushi Deli in the medium term, but the focus now is on Jollibean. 

- Given JFPL’s proven growth strategy and existing business model, we see clarity in earnings.  Management intends to open five new outlets for any brand under JFPL per annum. JFPL is estimated to generate at least SGD0.75mil in profit before tax in FY13F and we have imputed this into our earnings assumption, with a 174 day-contribution. As such, BFood’s earnings are expected to grow by 97% to RM22mil (inclusive of Starbucks’ nine months contribution).

  

- Jollibean’s operations in Malaysia and China are anticipated to commence in FY14. On the back of 50 Jollibean kiosks each in Malaysia (5 companyowned, 45 licensee-owned) and China (solely on licensing), earnings are expected to rise by 65% in FY14F. 

- On the flipside, capex for licensed-kiosks are fully borne by the licensees as part of their investment costs. Essentially, circa RM2mil of capex is absorbed by the group for company-owned Jollibean (5 new kiosks each in Malaysia and Singapore per annum), starting FY14F onwards.

- Given BFood’s strong balance sheet and cash cushion of RM42mil as at end-1QFY13, the acquisition was funded by 100% internal cash. This continues to put the group in a zero borrowing position. 

- Having said that, management highlighted lower dividends for FY13F as the group is gearing up for expansion. We have lowered our DPS assumption to 2.0 sen, translating into a dividend  yield of 1.6%. Nevertheless, dividends are expected to revert to at least 40% of earnings from FY14F onwards. 

- We retain our bullish conviction in BFood for its bright outlook, driven by a greater F&B portfolio of brands – Kenny Rogers Roasters, Starbucks, Jollibean, Sushi Deli, Kopi Alley and Dango – that is exposed to different geographies, healthy 3-year earnings CAGR of 57% and improving cash flow. We believe BFood deserves a premium against the current valuation of 12x FY14F PE, which is at a 25% discount to its global food peers.

Source: AmeSecurities