- Keep BUY and MYR1.29 TP, 14% upside, c.4% yield. 1H23 (Jun) core earnings met our and Street’s expectations, with YoY growth stemming from higher sales, attributable to new store contributions and stronger SSSG. The stock is trading at 15.3x FY24F P/E, below the industry average. Valuation is compelling, considering its sustainable earnings growth, driven by strategic outlet openings, strong pricing power, effective marketing engagements, and higher retail footfall from the return of Chinese tourists.
- Within expectations. Berjaya Food’s 1H23 revenue of MYR578.4m (+25.6% YoY) and core earnings of MYR67.0m (+25.7% YoY) are within expectations, at 53.1% and 49.3% of our and Street’s full-year estimates. The better 1H23 performance YoY was attributable to new store contributions, coupled with stronger SSSG. BFD’s 2Q23 core earnings contracted to MYR33.0m (-2.9% QoQ, -19.7% YoY) despite higher revenue (+4.3% QoQ, +8.3% YoY) during the year-end festive season. This was mainly due to margin compression, owing to higher raw material cost, absence of rental rebates, and higher staff costs from the minimum wage policy. Nonetheless, we understand that BFD increased its ASPs in Dec 2022 to mitigate the impact of cost pressures. A second interim DPS of 2 sen was declared (2Q22: 1 sen), and will go ex on 7 Mar.
- Outlook. We remain confident in management’s ability to execute its expansion plans and capture the immense growth opportunities. With about 433 stores (Starbucks: 373, Kenny Rogers Roasters (KRR): 70) as of 2Q23, BFD’s expansion target is still to open 35-40 Starbucks outlets and 4-6 KRR stores in FY23F. 40-45% of the Starbucks outlets will be in the drive-through format, with the company continuing with plans to penetrate semi-urban locations to extend its network presence. We believe the strategic increase in ASPs should be effective in softening the impact of increasing costs, considering the customer profile and Starbucks’ brand equity. Moving forward, BFD will continue to execute its effective marketing engagements and innovative product launches to drive revenue growth. Meanwhile, we learnt from management that Paris Baguette recorded a robust performance following its first store opening in Pavilion KL, and management is targeting five new outlets in the city centre before expanding to other cities.
- Forecasts and ratings. We keep our forecast and DCF-derived MYR1.29 TP, with a 2% ESG premium. Our TP implies a 17.5x FY24F P/E (+2SD from the mean) and is largely in line with the valuation for other discretionary names under our coverage. Keep BUY, as the valuation remains undemanding, considering BFD’s improving and sustainable earnings growth, Starbucks’ established brand equity, and management’s solid execution.
- Key risks: Labour shortage, weaker-than-expected consumer sentiment, and a drag in the expansion of BFD’s brands.
Source: RHB Research - 14 Feb 2023