This article first appeared in The Edge Financial Daily on August 21, 2017 - August 27, 2017

Berjaya Food Bhd
(Aug 18, RM1.60)
Upgrade to buy with a higher fair value (FV) of RM1.77: We come away enthused from our recent meeting with Berjaya Food Bhd’s (BFood) new management team. The strategic direction over BFood’s non-performing assets is constructive as we eagerly await its fruition. We upgrade our recommendation to “buy” from “hold”. Our higher FV of RM1.77 per share (from RM1.43 per share) is pegged at a higher price-earnings ratio (PER) of 25 times, reflecting a 20% premium to its historical valuations from our previous PER peg of 18 times. We think that it is justified as BFood is on the cusp of revival independent of a potential restructuring exercise, attractive growth off a low base and a stellar Starbucks brand.

Sydney Lawrence Quays resumed the chief executive officer (CEO) role at BFood in June 2017. It followed the departure of Datuk Francis Lee to Bermaz Auto Bhd. Prior to his new role, Sydney was head of BFood Starbucks and to our understanding, was pivotal in introducing the American brand to Malaysia 19 years ago. We are positive about his invaluable operational and marketing prowess seen with Starbucks applied to Kenny Rogers Roasters (KRR) with his now sweeping influence as group CEO.

His immediate strategy to revitalise BFood revolves around a three-pronged strategy which includes: i) disposals of Jollibean and KRR Indonesia, which saw losses of RM9.3 million and RM2.5 million respectively in financial year 2017 (FY17); ii) paring down of debt (net gearing: 60%) and lowering of effective tax rate (75% in FY17); and iii) a turnaround of KRR Malaysia. The successful execution of objective (ii) hinges on objective (i) There have been market expectations over BFood disposing of its non-performing assets over the past year or so. However, BFood appears to have a renewed sense of optimism about the sale of its non-performing assets; likewise, we eagerly await it coming to fruition. Independent of write-offs, FY18/FY19 earnings could be lifted by 19%/25%. We see the potential sale of the assets to lift sentiment and catalyse BFood’s valuations.

Although BFood looks to turn around KRR Malaysia instead of selling it, we are nevertheless comforted that the initiative is driven by Sydney’s capable hands. The turnaround in KRR Malaysia involves: i) menu rationalisation, which would reduce wastage and inventory and simplify processes; ii) aiming for affordability with the lowering of prices from an average of RM30 to RM14; and iii) introduction of cafeteria-style service instead of table service, which would reduce error and labour headcount. These in-service changes would be on the back of an anticipated expansion of five to six stores in FY18, of which two are slated for Resorts World Genting.

Independent of the restructuring exercise, we regard BFood as being on the brink of a turnaround. In FY17, it shut down the bulk of its loss-making stores as KRR Malaysia, KRR Indonesia and Jollibean closed 10%, 30% and 30% of their total store counts respectively. Therefore, we anticipate significantly lower losses from these assets. On the other hand, Starbucks successfully navigated a 10% average selling price (ASP) hike in January 2017. Despite same store sales growth (SSSG) coming in flat for the quarter, it was still positive as the previous ASP hike in the first quarter of FY16 saw SSSG contract 7%. —  AmInvestment Bank, Aug 18