CIMB Research downgrades Berjaya Food to reduce, lower target price

RHB Research says Kenny Rogers Roasters (KRR) stores have the potential to turn around.

KUALA LUMPUR: CIMB Equities Research has downgraded Berjaya Food to reduce with a lower target price of RM1.38 from RM1.76 as its upside is limited due to rich valuations.

Accordingly, its end-2017 target price is adjusted lower to RM1.38 following its earnings per share (EPS) cut. 

“We continue to peg the stock to 20 times CY18F P/E, which is a 10% discount to its three year historical average (to account for the slower Kenny Roger Roasters (KRR) earnings). 

“We also downgrade the stock to a Reduce given current rich valuations of 25 times FY18F price-to-earnings (P/E) (+ one standard deviation of its three -year average mean P/E). Significant recovery in consumer spending is a key upside risk to our call,” it said on Thursday.

CIMB Research said although Berjaya Food’s 4QFY4/17 revenue grew 8.9% on-year to RM151.4mil, core net profit was down 49.3% on-year at RM1.6mil. 

Overall, this brought Berjaya Food’s full-year core net profit to RM17m (stripping out one-off write-down of fixed assets), only at 83% of our and 78% of Bloomberg consensus forecasts. 

The earnings deviation against our forecast was mainly due to the softer-than-expected performance from its Kenny Roger Roasters (KRR) chain of restaurants in Malaysia and Indonesia. 

Berjaya Food’s FY17 turnover ticked up 9.3% on-year to RM605.4m, driven by the increased contribution from Starbucks on the back of higher store count to 239 stores (+24 net stores in 2017), which offset the weaker revenue from KRR and Jollibean (-7.7% on-year). 

Nevertheless, FY17 pre-tax profit fell 32.5% on-year to RM24.6mil owing to widening losses at KRR Indonesia and Jollibean as weak consumer sentiment and intense competition continue to weigh on earnings. 

Revenue improved 8.9% on-year due to higher number of Starbucks outlets but pre-tax profit plunged 87% on-year to RM1mil. 

This was due to KRR Indonesia reporting wider losses of RM4mil (vs. 4QFY16: -RM1mil) as well as the higher write-down of fixed assets due to the closure of its loss-making KRR stores in both Malaysia and Indonesia. 

The group closed a total of 16 KRR stores in FY17, seven in Indonesia and nine in Malaysia, in line with management’s guidance.   

“Following the disappointing FY17 results, we cut our FY18-19F EPS by 21% to incorporate overall lower same store sales growth and higher operating costs for the group’s businesses as well as higher effective tax rates.

“Even though Berjaya Food’s earnings came in below expectations, we expect its performance to improve in FY18F (+34% on-year) as KRR losses narrow (from the closure of non-profitable outlets) as well as sustained growth and continuous expansion of its Starbucks stores,” it said.