- Stay BUY, new MYR1.29 TP from MYR1.13, 23% upside with c.4% yield. We continue to like Berjaya Food for its attractive valuation – it is trading at 15x FY23F (Jun) P/E, which is below the industry average. We believe the market has not fully priced in the elevated earnings base yet, which we think is sustainable – driven by strategic outlet openings, strong pricing power (that mitigates the impact of cost pressures), and engaging marketing initiatives and innovative products to stimulate consumer spending.
- Robust expansion plans. Berjaya Food is targeting to open 35-40 Starbucks outlets and 4-6 Kenny Rogers Roasters (KRR) stores in FY23. We gather that 40-45% of the Starbucks outlets will incorporate drive- through facilities, with the company still continuing with plans to penetrate semi-urban locations to extend its network presence. Elsewhere, we expect KRR to remain profitable following its rationalisation exercise. BFD has also opened the country’s first Paris Baguette at Pavilion Kuala Lumpur, serving French-inspired baked goods to premium customers (Figures 1-4). The group is targeting five more outlets (capex: c.MYR2m each) in the city centre before expanding further to other cities nationwide. That said, we expect muted earnings contributions from this JV at this stage.
- Strategic increase in ASPs. BFD increased ASPs in Dec 2022 to account for higher material and operating costs while lending support to SSSG (FY23F: 2%). Whilst we foresee knee-jerk reactions in the form of deterred volumes or downtrading, we believe it will be minor – customers should eventually adapt to the higher pricing after taking into consideration the customer profile and Starbucks’ brand equity.
- Results preview. BFD is scheduled to report its 2QFY23 results on 12 Feb. We expect the group to record a stronger QoQ earnings, driven by the year- end festivities. We expect 2HFY23 earnings to remain resilient, supported by outlet network expansion, margins recovery led by price increases, robust spending, and effective marketing engagements and innovative product launches. Additionally, the higher retail footfall from the return of tourists from China also bodes well for BFD, in our view.
- Forecast and ratings. We increase our Street-low FY23-25F earnings by 13.6%, 14.3% and 14.1%, as we believe our previous estimates were too conservative – taking into account BFD’s sustained earnings momentum. Correspondingly, our DCF-derived TP rises to MYR1.29, which implies 18x FY23F P/E (+1SD from the mean) and is largely in line with the valuations of most of the other discretionary consumer counterss under our coverage. We input a 2% ESG premium to our TP, as BFD’s ESG score of 3.1 is above the country median.
- Key risk. Weaker-than-expected consumer sentiment and a drag in the expansion of BFD’s brand.
Source: RHB Research - 9 Feb 2023
