This article first appeared in The Edge Financial Daily on March 19, 2018 - March 25, 2018

Berjaya Food Bhd
(March 16, RM1.75)
Maintain buy with a target price (TP) of RM2.18: Berjaya Food Bhd’s prospects remain promising, given the sustainable growth driven by Starbucks on the back of outlet expansion and our anticipation of better consumer sentiment moving forward. Kenny Rogers Roasters Malaysia (KRRM) is expected to return to the black in financial year 2019 (FY19) as a result of the implementation of various new strategies, which have managed to give the franchise a new lease of life and attracted more footfall at its outlets. Berjaya Food will stop consolidating losses from Kenny Rogers Roasters Indonesia (KRRI) in the fourth quarter of FY18 (4QFY18), following the completion of its disposal. These would all support our forecast three-year net profit compound annual growth rate (CAGR) of 38%, even after we trimmed our earnings forecast by 7% to 14% post-results. We maintain “buy”, with a higher discounted cash flow-derived TP of RM2.18 (from RM2.16, a 19% upside) after rolling forward the valuation base year. Risks to our recommendation include a slower-than-expected turnaround of KRRM and weaker-than-expected same-store sales growth (SSSG).

Berjaya Food’s nine months of FY18 (9MFY18) core net profit (CNP) of RM16 million (+7%) was below expectations at 52% to 64% of our and the consensus forecasts. The negative deviation could be largely attributed to the slower-than-expected recovery at KRRM and a higher-than-expected effective tax rate. Year-on-year (y-o-y), 9MFY18 revenue grew 6% to RM480 million, largely driven by Starbucks on the back of a higher number of stores and positive SSSG. Excluding a one-off loss of RM15 million, in relation to the disposal of KRRI, CNP grew 7% to RM16 million. This was as the higher earnings contribution from Starbucks more than offset the increased losses at KRRM.

We trim our FY18 forecast (FY18F) to FY20F earnings by 14%, 7% and 7% respectively to take into account the slower-than-expected turnaround at KRRM and a higher effective tax rate. Our TP implies an FY19F price-earnings ratio (PER) of 22.4 times, in line with its five-year mean. We believe the headline losses should not be taken negatively by the market, as the completion of KRRI’s disposal would be positive to Berjaya Food, given that the former had been a drag on sentiment and earnings. We continue to like the firm for its Starbucks-driven growth. We believe KRRM will turn around in FY19 after the implementation of new strategies to revive the franchise in Malaysia. We forecast Berjaya Food will chart a three-year earnings CAGR of 38% and reiterate our “buy” call. — RHB Research, March 16