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Berjaya Food (BFD MK) Buy Consumer Cyclical - Restaurants Target Price:MYR4.00 Market Cap: Usd286m Price:MYR3.06

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Berjaya Food (BFD MK) Buy Consumer Cyclical - Restaurants Target Price:MYR4.00 Market Cap: Usd286m Price:MYR3.06 Initiating Coverage, 19 November 2014 Berjaya Food (BFD MK) Buy Consumer Cyclical - Restaurants Target Price:MYR4.00 Market Cap: USD286m Price:MYR3.06 Macro ¡¡ From Grande To Venti Risks ¡¡ Growth ¡¡ Value ¡¡ Berjaya Food (BFD MK) We initiate coverage on Berjaya Food with a BUY recommendation and Price Close Relative to FTSE Bursa Malaysia KLCI Index (RHS) MYR4.00 TP, implying a 24.6x FY16 (Apr) P/E and offering a 30.7% 3.60 208 upside. Its recently-completed acquisition of the remaining 50% stake in BStarbucks could propel its 3-year-earnings CAGR to 47.7%. Starbucks 3.10 180 Coffee, Malaysia’s largest coffee chain with 175 outlets YTD, is set to aggressively expand its number of outlets over the next few years. 2.60 152 ♦ Riding on Starbucks Coffee’ growth wave. With a globally-recognised brand, Starbucks Coffee is the largest coffee chain in Malaysia with 175 2.10 124 outlets YTD or a 38% market share by number of similar outlets. Since FY11, it has achieved double-digit profit growth on the back of similar 1.60 96 same-store sales growth (SSSG) and aggressive store expansion. For FY14, its SSSG was 16%, the highest at the global level. 1.10 68 18 ♦ Under-penetration of Starbucks Coffee outlets. Malaysia’s Starbucks 16 14 Coffee’s outlet penetration rate of six outlets per million people is lower 12 vs other developed Asian countries (8-19 outlets per million people). 10 8 Given changing lifestyles, rising household income and increasing 6 4 urbanisation, we believe there is ample room for expansion. 2 Vol m ♦ Potential injection of other F&B businesses. Berjaya Food (BFood) also holds the franchise rights and operates Kenny Rogers Roasters Jul-14 Jan-14 Mar-14 Nov-13 Sep-14 May-14 (KRR) in Malaysia, Indonesia and Cambodia via parent company Source: Bloomberg Berjaya Corp (BCorp) (BC MK, NR), which has the global rights to the brand. The latter also holds the franchise rights in Malaysia for many Avg Turnover (MYR/USD) 1.24m/0.39m recognisable food and beverage (F&B) brands such as Wendy’s, Krispy Cons. Upside (%) 23.9 Kreme and Papa John’s Pizza. In our view, it is possible for BCorp to inject these other F&B brands into BFood in the future. Upside (%) 30.7 52-wk Price low/high (MYR) 1.37 - 3.18 ♦ BUY, with a TP of MYR4.00. Our TP (24.6x FY16 P/E) assumes the full Free float (%) 42 dilution of its outstanding warrants. Full-year impact of Berjaya Starbucks Coffee Company SB’s (BStarbucks) consolidation would be felt in FY16. Share outstanding (m) 313 We believe a 10% premium multiple to that of its regional peers is Shareholders (%) justified as: i) it has a strong 3-year earnings CAGR of 47%, ii) Starbucks Berjaya Corp. Berhad 52.0 Coffee is a strong global brand, and iii) there are growth opportunities Perbadanan Nasional Berhad 6.6 from the under-penetration of Starbucks Coffee outlets in Malaysia. ♦ Risks: slowdown in consumer spending, currency fluctuation, fluctuation in prices of raw materials and competition. See page 7 for key risks. Share Performance (%) YTD 1m 3m 6m 12m Absolute 88.9 11.3 2.0 105.4 83.2 Fore ca sts a nd Va luations Apr-13 Apr-14 Apr-15F Apr-16F Apr-17F Relative 92.1 10.3 5.0 109.5 82.4 Total turnover (MYRm) 122 150 384 631 736 Reported net profit (MYRm) 18.6 22.7 33.5 59.6 73.1 Recurring net profit (MYRm) 18.6 22.7 33.5 59.6 73.1 Recurring net profit growth (%) 67.4 21.7 47.9 77.8 22.5 Recurring EPS (MYR) 0.07 0.08 0.09 0.16 0.19 Fong Kah Yan +603 9207 7668 DPS (MYR) 0.03 0.04 0.04 0.08 0.10 [email protected] Recurring P/E (x) 42.9 36.3 34.8 19.5 16.0 P/B (x) 5.60 5.10 3.14 2.91 2.67 P/CF (x) 66.0 77.5 15.1 15.0 12.2 Dividend Yield (%) 1.0 1.4 1.4 2.6 3.1 EV/EBITDA (x) 17.7 23.4 23.2 11.8 10.0 Return on average equity (%) 18.7 14.9 12.6 15.5 17.4 Net debt to equity (%) net cash net cash 56.9 44.4 31.9 Our vs consensus EPS (adjusted) (%) 8.3 18.3 15.1 Source: Company data, RHB See important disclosures at the end of this report Powered by EFATM Platform 1 Note: EPS assumes full-dilution from outstanding warrants Berjaya Food (BFD MK) 19 November 2014 Table Of Contents Investment Summary 3 Valuation 4 Key Risks 7 Industry Overview 8 Investment Case 12 Financial Analysis 17 Company Background 22 Appendix 24 Financial Exhibits 25 SWOT Analysis 27 Disclosure & Disclaimer 29 See important disclosures at the end of this report 2 Berjaya Food (BFD MK) 19 November 2014 Investment Summary Starbucks Coffee, the largest coffee outlet chain in Malaysia. Starbucks Coffee ♦ Starbucks Coffee is the largest coffee outlet has the largest presence in Malaysia with 175 outlets YTD, followed by its closest chain in Malaysia, and has a 38% market competitor, Coffee Bean & Tea Leaf with less than half the number of the former’s share outlets. It is the market leader in the segment with a 38% market share by number of similar outlets. For the past five years, its SSSG has grown by double digits. In FY14, its SSSG of 16% was the highest at the global level. We believe that Starbucks Coffee’s earnings are less susceptible to weak consumer spending patterns due to the strong customer loyalty for its products as well as its premium branding. ♦ Starbucks Coffee’s outlet penetration rate is Under penetration of Starbucks Coffee outlet in Malaysia. Malaysia had a at six outlets/million people in 2Q14 vs 8-19 Starbucks Coffee outlet penetration rate of six outlets per million people in 2Q14, outlets/million people in other developed which is fairly low compared with other developed Asian countries, where the outlet Asian countries penetration rate is 8-19 outlets per million people. Given the expected rise in household income as well as increasing urbanisation, we believe there is room for Starbucks Coffee to further grow in Malaysia. Potential injection of other F&B businesses. BFood also holds the franchise rights and operates KRR in Malaysia, Indonesia and Cambodia through its parent company, Berjaya Corp, which holds the global rights to the brand. The latter also holds the franchise rights in Malaysia for many recognisable F&B brands like Wendy’s, Krispy Kreme and Papa John’s Pizza. In our view, there is potential for BCorp to inject these brands into BFood in the future. BStarbucks’ stellar performance is likely to continue. For the past five financial years, BStarbucks’ earnings grew at strong double digits YoY on the back of the aggressive expansion of its outlets, double-digit SSSG as well as higher margins. Moving forward, we expect revenue CAGR of 19.7% over FY15-17F, driven by the expansion of outlets and incremental increase in sales per outlet. We expect its earnings CAGR of 20.3% over FY15-17F could be accompanied by margin improvements arising from its economies of scale. Initiate coverage with BUY. BFood will likely be on a strong earnings growth ♦ Valuation premium is justified given its strong trajectory stemming from its Starbucks Coffee arm, following the completion of the earnings growth trajectory and Starbucks acquisition of the remaining 50% stake in BStarbucks. Our TP of MYR4.00 is derived Coffee’s strong franchise value by pegging a 24.6x P/E to its fully-diluted FY16 EPS. We believe its valuation premium is justified given its: i) strong 3-year expected earnings CAGR of 47.7%, ii) Starbucks Coffee’s strong franchise value, and iii) Starbucks Coffee being the largest coffee chain in Malaysia. Figure 1: Starbucks Coffee is the market leader by outlet Figure 2: BStarbucks' revenue and PATAMI number among the coffee chains in Malaysia for FY14 MYRm Others 10% 600 Gloria Jean's 500 517.3 8% 400 440.3 San Starbucks Francisco 38% 366.4 8% 300 301.4 Dome 5% 200 234.2 183.3 144.7 100 60.9 35.0 40.5 49.6 McCafe 10.6 17.1 23.6 17% Coffee Bean & Tea Leaf 0 14% FY11 FY12 FY13 FY14 FY15F FY16F FY17F Revenue PATAMI Source: Company data Source: Company data, RHB See important disclosures at the end of this report 3 Berjaya Food (BFD MK) 19 November 2014 Valuation BUY with TP of MYR4.00. We initiate coverage on BFood with a BUY recommendation and a TP of MYR4.00 (rounded) which represents a 30.7% upside return. Our TP is derived by pegging the group’s fully-diluted FY16F earnings (assuming the full conversion of outstanding warrants) to a 24.6x P/E multiple which is 10% above the regional peer average (see Figure 5). We corroborate our findings with a DCF valuation (see Figure 6.) Although we expect the earnings growth of its KRR and Jollibean brands to be flat in the near to medium term, we think BFood will likely be on a strong earnings growth trajectory due to Starbucks Coffee, following the completion of the acquisition of the remaining 50% stake in BStarbucks. Figure 3: Salient terms of BFood's warrants Issue size 115.1m* Conversion rate 1 warrant for 1 BFood share Expiry date 8 Aug 2017 Conversion rate Anytime upon issuance Exercise price MYR0.70 *Note: As of 1 Aug 2014, there were 95.7m outstanding warrants Source: Company data Figure 4: Derivation of TP Full conversion of warrants FY16 recurring net profit (MYRm) 59.6 Net interest income from warrants proceeds 2.8 62.4 Current share base (m) 313.3 Enlarged share base from conversion of outstanding warrants and ESOS* (m) 381.0 Fully-diluted EPS (MYR) 0.16 TP (rounded) at 24.6x FY16 P/E 4.00 *Note: based on our calculations, the current number of outstanding warrants including the employee Stock Options (ESOS) = 67.7m Source: RHB ♦ 10% premium over its ASEAN peers is A premium of 10% over its ASEAN peers.
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