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 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%. 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 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, 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. Per Figure 5, the 24.6x P/E multiple we justified used implies a 10% premium to its regional peer average of 22.4x FY15 P/E. We believe BFood deserves a premium given its: i) Strong 3-year expected earnings CAGR of 47.7% (in Figure 5 below the 3-year EPS CAGR column shows the historical rates; See page 18 on “Consolidation of BStarbucks to drive 47.7% 3-year earnings CAGR in FY14-17F”); ii) Starbucks Coffee’s strong franchise value; and iii) Starbucks Coffee being the largest coffee chain in Malaysia whereby in FY14, its SSSG was 16% - the highest at the global level. The ascribed 24.6x P/E implies an undemanding price-to-earnings growth (PEG) of 0.52x.

Figure 5: ASEAN and North Asia peer comparison Company BB Ticker Rating Currency PriceTarget FYE Mkt Cap Beta P/E (x) 3-yr EPS EV/ P/BV (x) ROE (%) NDY (%) price CAGR EBITDA (USDm) FY13 FY14 FY15 (%) FY15 FY14 FY15 FY14 FY15 FY14 FY15

Jollibee Foods Corp JFC PM NR PHP 196.9 NR Dec 4664.7 1.0 40.0 38.8 33.1 15.7 15.9 8.6 7.9 22.7 25.5 1.3 1.4 Max's Group MAXS PM NR PHP 21.5 NR Dec 248.5 0.6 nm nm nm nm nm nm nm nm nm nm nm Oishi Group OISHI TB NR THB 82.5 NR Dec 471.5 0.7 28.4 30.9 22.3 19.2 10.3 4.3 3.8 14.8 18.5 1.7 2.0 Minor International MINT TB BUY THB 33.25 40.00 Dec 4025.0 1.2 31.6 30.4 25.3 nm 16.6 4.7 4.1 16.5 17.4 nm nm MK Restaurants Group M TB NEUTRAL THB 58.00 63.00 Dec 1603.4 nm 23.1 22.3 19.5 nm 6.9 4.0 3.8 18.5 20.1 3.6 4.1 BreadTalk Group BREAD SP BUY SGD 1.35 2.00 Dec 294.68 1.0 28.0 26.7 20.9 17.6 5.4 3.7 3.3 14.5 16.7 1.3 1.6 OldTown^ OTB MK BUY MYR 1.73 2.15 Mar 231.91 1.3 16.0 15.7 12.9 nm 5.7 2.3 2.1 14.7 16.8 3.2 3.9 Simple Avg. 0.9 27.9 27.5 22.4 17.5 10.1 4.6 4.2 16.9 19.2 2.2 2.6

Ajisen 538 HK NR HKD 5.24 NR Dec 737.3 0.9 21.2 19.6 16.5 11.9 5.8 1.7 1.6 9.1 10.3 3.1 3.7 Fairwood Holdings^ 52 HK NR HKD 18.02 NR Jun 293.8 0.5 21.1 nm nm nm nm nm nm nm nm nm nm Simple Avg. 0.7 21.2 19.6 16.5 11.9 5.8 1.7 1.6 9.1 10.3 3.1 3.7

Berjaya Food^ BFD MK BUY MYR 3.08 4.00 Apr 290.1 1.2 36.6 35.0 19.7 31.6 11.9 3.2 2.9 12.6 15.5 1.4 2.5 Note: Share prices as at 13 Nov 2014, ^ FY13-15 valuations refer to FY14-FY16 data

Source: Bloomberg, RHB Figures for Berjaya Food in Figure 5 are slightly different from those in table on page 1 due to timing differences.

See important disclosures at the end of this report 4

Berjaya Food (BFD MK) 19 November 2014

Corroborative valuation through DCF. We used conservative estimates, a weighted average cost of capital (WACC) of 8.8% and a terminal growth rate of 2.5%, to derive a TP of MYR4.00 through a DCF method. Our DCF-derived TP implies FY15/FY16/FY17 P/Es of 45.4/24.6x/20.9x on a fully-diluted basis. In Figure 7 we show a sensitivity analysis. Figure 6: DCF valuation FYE Apr (MYRm) FY15 FY16 FY17 FY18 FY19 FY20 Recurring net profit 33.5 59.6 73.1 87.0 102.0 117.8 Add: Non-cash charges (depreciation) 18.0 30.2 29.2 27.4 25.0 23.1 Add: After-tax interest 5.36 3.42 3.42 3.42 3.42 3.42 Less: WC investments 0.3 -8.1 -3.2 -3.4 -3.7 -3.9 Less: Fixed investments (capex) -38.1 -20.0 -25.0 -20.0 -15.0 -15.0 FCFF 19.1 65.2 77.5 94.5 111.7 125.4 Disc. FCFF 19.1 59.9 65.5 73.3 79.7 82.2

Terminal value at Y=5 (FY20) 2,033.9

PV of terminal value 1,332.9

NPV* 360.6

Less FY15 net debt -210.3

Total equity value 1,483.2

Cash proceeds from conversion of outstanding 47.3 warrants 1,530.5

Enlarged share base from conversion of outstanding 381.0 warrants TP (rounded) 4.00

Rf 4.0% COE 10.2%

Beta 1.2 COD 6.0%

Risk premium (Rm-Rf) 5.2% WACC 8.8%

Rm 9.2% Tax rate 24.0%

Terminal 2.5% growth *Note: NPV based conservatively on Disc. FCFF for FY16-FY20 Source: RHB

Figure 7: TP (MYR) sensitivity to WACC and terminal growth rates

WACC 7.3% 7.8% 8.3% 8.8% 9.3% 9.8% 10.3%

0.0% 3.70 3.40 3.20 3.00 2.80 2.60 2.40

0.5% 4.00 3.70 3.40 3.10 2.90 2.70 2.50 1.0% 4.30 3.90 3.60 3.30 3.10 2.90 2.70 1.5% 4.60 4.20 3.80 3.50 3.30 3.00 2.80

2.0% 5.00 4.50 4.10 3.80 3.50 3.20 3.00

2.5% 5.50 4.90 4.40 4.00 3.70 3.40 3.10

Terminal growth rates rates growth Terminal 3.0% 6.10 5.40 4.80 4.40 4.00 3.60 3.30

3.5% 6.90 6.00 5.30 4.70 4.30 3.90 3.50 4.0% 7.90 6.70 5.90 5.20 4.60 4.20 3.80

Source: RHB

P/E rose to its peak since listing. After it announced the acquisition of the remaining 50% of equity interest in BStarbucks from Starbucks Coffee International

See important disclosures at the end of this report 5

Berjaya Food (BFD MK) 19 November 2014

(SCI) on 23 July 2014, BFood’s share price gained 71.1% to date and P/E re-rated higher – almost touching +2SD from its historical trading range (see Figure 8). In our view, the market is willing to assign higher valuation multiples to BFood for having full control to develop and manage the Starbucks Coffee brand in Malaysia.

Figure 8: 12-month forward P/E Figure 9: 12-month forward P/BV

25 3.0

+2SD = 21.3x 2.5 20 +1SD = 2.2x +1SD = 17.3x 2.0 15 AVG = 1.7x AVG = 13.4x 1.5 -1SD = 1.2x 10 -1SD = 9.4x 1.0 -2SD = 5.4x 5 0.5

0 0.0 Apr-11 Apr-12 Apr-13 Apr-14 Apr-11 Apr-12 Apr-13 Apr-14

Source: RHB Source: RHB

See important disclosures at the end of this report 6

Berjaya Food (BFD MK) 19 November 2014

Key Risks Slowdown in consumer spending. According to data on household consumption by the Malaysia Department of Statistics, Malaysians typically spend about one-third of their wages on food and non-alcoholic beverages. Hence, a slowdown in consumer spending would have an adverse impact on BFood sales. Intense competition in the food and beverage (F&B) industry. The F&B industry in Malaysia is competitive with many new players emerging on a regular basis. The group’s competitors include a large and diverse group of restaurant chains as well as independent local operators. With increasing competition, BFood may face pricing pressure. Currency fluctuations. BFood has exposure to a few foreign currencies given its existing operations outside Malaysia such as Singapore, Indonesia, Brunei and Cambodia. All sales are transacted in the currencies of the respective countries of operations except Cambodia, where sales are transacted in USD. However, its most significant foreign currency exposure is to the USD since approximately 50% of BStarbucks’ purchases of drink ingredients, various supplies and equipment are denominated in USD. Based on our sensitivity analysis, every 10% deterioration in the MYR exchange rate vs the USD could negatively impact BFood’s PATAMI by approximately 7%.

Figure 10: USD/MYR has been on an uptrend since early 2014; Approx. 50% of BStarbucks’ COGS is denominated in USD

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 average average average average average average average average average average 3.4 MY R3.15 MY R3.08 MY R3.05 MY R3.08 MY R3.12 MY R3.23 MY R3.25 MY R3.28 MY R3.21 MY R3.22

3.3

3.2

3.1

3

2.9

2.8

2.7 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14

Source: Bloomberg

Fluctuating rental rates. Given that most of BFood’s restaurants and outlets are operated on rented properties, the group has significant exposure to the retail rental market. For FY14, its rental expenses represent ~20% of total operating costs. Meanwhile, for BStarbucks, rental expenses represent 43.1% of total operating costs. Hence, its earnings may be adversely affected by any substantial increase in rental expenses of its restaurants and outlets. Most of the group’s tenancy agreements are for an initial period of three years with an option to further extend for another two terms of three years each. Fluctuation in prices of raw materials. As BFood is involved in the F&B industry, 35-45% of its total COGS comprise raw material costs. Hence, a substantial increase in raw material prices would have an adverse impact on the group’s earnings in the event that it is unable to pass on the increase in costs to customers. BStarbucks is obligated to buy its supply of coffee beans and Frappuccino powder from SCI. Although we note that Arabica coffee bean prices have increased sharply since early 2014, we learned from management that prices for coffee have been locked in for FY15 as Starbucks Coffee Corp (SBUX US, NR) has locked in all of its coffee needs for 2014 and 60% of its needs for 2015. For FY16, we take into account in our forecasts potentially higher prices of Arabica coffee beans.

See important disclosures at the end of this report 7

Berjaya Food (BFD MK) 19 November 2014

Industry Overview Starbucks Coffee to buck flat consumer spending pattern. We expect consumer spending in Malaysia to be flat in the near term, in view of the: i) rising cost of living, ii) rationalisation of government subsidies, and iii) upcoming implementation of the goods and services tax (GST). Although basic food items will generally be unaffected as demand is generally inelastic, we expect discretionary spending to decline. As such, we believe BFood’s KRR operation may be affected by lower patronage from its targeted customers/families, which are more susceptible to rising cost of living. However, in the case of Starbucks Coffee, we believe its operation will likely be unaffected given that it is a premium brand with a different customer base which is less susceptible to the increase.

Figure 11: Malaysia’s consumer sentiment index

130 125 123 118 119 120 114 115 115 110 110 105 102 100 100

95 97 98 90 85 82 80 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

*100 indicates neutrality,>100 indicates expected improvement in conditions,<100 indicates lack of confidence Source: Malaysian Institute of Economic Research (MIER)

Booming coffee culture in Malaysia. Making traditional roasted local coffee is a cottage industry whereby coffee manufacturers supply coffee powder to local coffee shops and stalls directly. The remainder is sold to consumers via mini markets, convenience stores or sundry shops. Some manufacturers have ventured into 3-in-1 coffee packs, targeting households through retailers and supermarket chains. However, we note that people’s lifestyles have changed significantly over the years in tandem with economic growth. Malaysians have become more affluent, resulting in a change in taste, while consumption of F&B at western-style cafés has grown tremendously – particularly in big towns and cities. Malaysia’s coffee culture is also shifting from dining places to new hot spots where patrons – particularly among the Gen-Y and Gen-Z – are also able to hang out. The café is not only a place to consume coffee, but also a place to use technology in a cozy environment where customers could enjoy complementary food to go with their beverage.

Figure 12: Coffee industry in Malaysia

Source: University of Malaya, Malaysia

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Berjaya Food (BFD MK) 19 November 2014

Increasing urbanisation and change in lifestyle to boost the premium coffee chain industry. According to a 2014 market report by Euromonitor International, the Malaysian coffee industry is likely to see positive growth, driven by young consumers’ demand for convenient and fashionable products. The report added that increasing urbanisation in Malaysia and the changes in lifestyles due to the opening up of the economy would influence buyers’ decisions. The segment is likely to remain strong in the forecast period due to Malaysians’ changing preferences for beverages.

Figure 13: Mean monthly gross household income in Malaysia Figure 14: 53.2% of the population in Malaysia are targeted and its YoY growth (%) customers of Starbucks Coffee

Person ('000) 7,000 35% 7,000 29.2% 29.0% 53.2% 30% 6,000 6,000 5,820 24.2% 5,428 21.8% 25% 5,072 5,000 18.0% 5,000 4,562 20% 13.5% 4,000 15% 4,000 3,575 9.2% 7.9% 2,715 3,000 10% 3,000

5% 2,000 2,000 1,572 0% 970 -5.1% 1,000 1,000 -5% 1,563 2,020 2,606 2,472 3,011 3,249 3,686 4,025 5,000 5,900 0 0 -10% 0-9 10-19 20-29 30-39 40-49 50-59 60-69 70+ 1992 1995 1997 1999 2002 2004 2007 2009 2012 2014 Age group

Source: Department of Statistics, Malaysia Source: Vital Factor Consulting, Department of Statistics, Malaysia (mid-2013)

Figure 15: Malaysia's urbanisation rate (%) is on the rise

74% 4.3% 5%

72% 3.6% 4% 3.5% 3.4% 3.3% 3.2% 70% 3.2% 3.1% 4% 3.1% 3.0% 2.9% 2.8% 68% 2.8% 3%

66% 3%

64% 71.7% 72.5% 2% 70.9% 70.1% 69.2% 68.4% 62% 67.5% 2% 66.6% 65.7% 64.8% 60% 63.9% 1% 62.9% 62.0% 58% 1%

56% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

% of urban population vs. total Urban population growth YoY

Source: The World Bank

Malaysia is underpenetrated vs other developed Asian countries. As of 2Q14, Starbucks Coffee has a penetration rate of six outlets per million people in Malaysia, or nine outlets per million people out of the top three largest coffee chains in the country. This is fairly low compared with other developed markets like Singapore, South Korea, Japan and (see Figure 16). As people become more affluent, their lifestyles upgrade and household incomes rise. This, together with increasing urbanization, lead us to believe there is ample room for Starbucks Coffee to grow in Malaysia.

See important disclosures at the end of this report 9

Berjaya Food (BFD MK) 19 November 2014

Figure 17: Starbucks Coffee outlet count and other major Figure 16: Coffee chain outlet penetration rates coffee chains in Asia Outlet per million person

45 40 No. of Starbucks Coffee outlets Others 40 33 as of 2Q14 35 31 30 Japan 1,038 Doutor Coffee, Tully's Coffee 25 22 South Korea 640 Café Bene, Toms n Toms 19 20 China 479 85C Bakery Cafe, Costa Coffee 15 13 13 8 9 Taiwan 308 85C Bakery Café, Dante 10 5 6 2 4 3 The Philippines 226 Figaro, Coffee Bean and Tea Leaf 5 0 1 0 Thailand 192 True Coffee, Coffee World Coffee Bean and Tea Leaf, San Malaysia 167 China

Japan Francisco Coffee Taiwan Thailand S. Korea Malaysia

Singapore Coffee Bean and Tea Leaf, Costa Philippines Singapore 102 Coffee Starbucks outlet penetration rate

Coffee chain outlet penetration rate (top 3 largest coffee chains) Source: Starbucks Coffee Corp, The World Bank Source: Starbucks Coffee Corp, Company data

Competitive F&B landscape. The Malaysian F&B industry is highly competitive. As consumers are spoilt for choice, the bar is raised for F&B companies fighting for a larger slice of the pie. The Malaysian F&B industry is divided into four broad categories, namely: i) Full service restaurants (FSR); ii) Quick-service restaurants (QSR); iii) Small-to-medium independent F&B operators; and iv) Cafés and bars.

BFood positions itself as a FSR operator through its KRR restaurants and a café operator through its Starbucks Coffee outlets. We have identified below the closest competitors of BFood in both its core operations, whereby these players have similar F&B offerings as KRR and Starbucks Coffee.

Figure 18: Key competitors of Starbucks Coffee in Malaysia

Berjaya Starbucks Coffee Coffee Bean & Tea Leaf San Francisco Coffee Wonderful Lifestyle SB SB (Malaysia) SB SB

Key brands Starbucks Coffee Coffee Bean & Tea Leaf San Francisco Coffee Gloria Jean's Coffee Number of local outlets 175 61^ 33^ 32^ , , , , , Kuala Lumpur, Selangor, Kuala Lumpur, Selangor, Location of local outlets , , Penang, Perak, Pahang, Kuala Lumpur, Selangor Putrajaya, , Melacca, , Johor, , , Penang, Sabah Sabah, Sarawak

Location of overseas outlets Brunei Nil Nil Brunei

Number of overseas outlets 1 Nil Nil 3^

Stores are usually Stores are usually found in Stores are usually found Stores are usually found Business model opened within office shopping malls in shopping malls within office buildings buildings

All outlets are directly All outlets are directly All outlets are directly All outlets are franchised operated operated operated

Financial Year Ended 30 Apr 2014 31 Dec 2012 31 Dec 2012 31 Dec 2013 Revenue (MYRm) 301.1 64.7 9.9 NA PBT (MYRm) 50.0 4.7 0.5 NA PBT margin (%) 16.6% 7.3% 4.9% NA PAT (MYRm) 35.0 3.2 0.5 NA PAT margin (%) 11.6% 5.0% 4.9% NA ^ Information based on the company’s official webpage Source: Company data, Suruhanjaya Syarikat Malaysia (SSM)

See important disclosures at the end of this report 10

Berjaya Food (BFD MK) 19 November 2014

Figure 19: Key competitors of KRR Malaysia

Berjaya Roasters (M) SB Nando’s Chickenland (M) SB TCRS Restaurants SB

Key brands Kenny Rogers Roasters Nando’s The Chicken Rice Shop Number of local outlets 88 58^ 68^ Kuala Lumpur, Selangor, Johor, Kedah, Kuala Lumpur, Selangor, Perak, Kuala Lumpur, Putrajaya, Selangor, , Melaka, Negeri Sembilan, Penang, Kedah, Negeri Sembilan, Location of local outlets Negeri Sembilan, Melaka, Penang, Pahang, Perak, Penang, Putrajaya, Melaka, Johor, , Perak, Johor, Terengganu, Sabah Sabah, Sarawak Kelantan, Pahang, Sabah, Sarawak Indonesia, Cambodia via Location of overseas outlets Nil Nil Berjaya Food (International) SB

Number of overseas outlets 25 Nil Nil

Restaurants are usually found in Restaurants are usually found in Restaurants are usually found in Business model shopping malls shopping malls shopping malls

78 outlets are directly operated while 10 All outlets are directly operated All outlets are directly operated outlets are franchisee-operated

Financial Year Ended 30 Apr 2014 31 Dec 2013 31 Dec 2013 Revenue (MYRm) 96.1 110.3 93.5 PBT (MYRm) 12.1 6.4 2.8 PBT margin (%) 12.6% 5.8% 3.0% PAT (MYRm) 9.1 4.3 1.6 PAT margin (%) 9.5% 3.9% 0.02% ^ Information based on the company’s official webpage Source: Company data, Suruhanjaya Syarikat Malaysia (SSM)

See important disclosures at the end of this report 11

Berjaya Food (BFD MK) 19 November 2014

Investment Case High On Caffeine Recent acquisition of the remaining 50% equity interest in BStarbucks. The acquisition of the remaining 50% interest in BStarbucks from SCI was completed on 18 Sep 2014, whereby the whole acquisition of MYR279.5m will be funded by bank borrowings. The acquisition will likely be an earnings boost to BFood, as BStarbucks’ earnings have always been the key earnings driver for BFood since its investment back in Jul 2012. Post-acquisition, BFood holds area development and operation agreement rights, which grants them the right to develop and manage Starbucks Coffee operations in Malaysia until 2039. In exchange for the rights, BFood is to pay 6% of BStarbucks’ sales as royalty fees on a monthly basis to SCI, as well as open a minimum of 25 new stores each year from 2015 to 2019. Capitalising on Starbucks Coffee’s strong branding. From opening the first store in Kuala Lumpur on 17 Dec 1998, Starbucks Coffee has grown by leaps and bounds to 175 stores YTD and a double-digit SSSG since FY11. In terms of coffeehouse franchises, Starbucks Coffee has the largest presence in Malaysia, followed by Coffee Bean & Tea Leaf with 61 outlets YTD. It is the market leader in the segment with 38% of market share by the number of outlets. Despite the weakening consumer sentiment recorded in the recent quarters, its SSSG in Malaysia for FY14 hit 16% which is the highest among the brand’s operations around the globe. We attribute the growth to its premium branding, as its targeted customers are less affected by the rising living costs.

Figure 20: Starbucks Coffee Malaysia’s outlets FY2009-FY2014 Figure 21: Starbucks Coffee’s SSSG (%)

180 25% 25% 19.7% 160 22% 20% 140 20% 12.5% 15% 120 17% 16% 10% 100 15% 4.3% 5.2% 80 5% 11% 60 0% 10% 7% 40 -5.0% -5% 20 5% 121 115 120 135 142 170 0 -10% FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 0% 0% FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 No. of outlets Same-store growth (%)

Source: Company data Source: Company data

Starbucks Coffee Card continues to build brand loyalty. The Starbucks Coffee Card is a prepaid card used to purchase items in Starbucks Coffee outlets, and carries with it additional benefits. The launch of the Starbucks Coffee Card since Nov 2011 has been well received thus far. It has built brand loyalty among its customers, which helped to sustain its double-digit SSSG for the past four years. We understand from management that 46% of BStarbucks’ total transactions in FY14 were transacted using the Starbucks Coffee Card. Presently, up to 1.6m cards have been issued. In Jun 2014, the group launched an application that allows customers to make purchases through smartphones by flashing them at the counter’s scanner.

See important disclosures at the end of this report 12

Berjaya Food (BFD MK) 19 November 2014

Figure 22: Starbucks Coffee Malaysia’s latest seasonal Figure 23: Malaysia’s Starbucks Coffee Card offerings

Source: Company data Source: Company data

Focus on standalone outlet expansion to drive margin expansion. YTD, there are 17 Starbucks Coffee drive-through outlets in Malaysia. Moving forward, management will focus on the expansion of drive-through and standalone outlets as their rental rates are significantly lesser than that of outlets in shopping malls. For FY14, rental expenses represent 43.1% of total operating costs. We understand from management that rental expenses in shopping malls account for 15-20% of sales compared with the 8-9% recorded for standalone outlets. We believe the focus on expanding its standalone outlets could lead to its margins widening as a result of lower operating costs from savings in rental expenses.

Figure 24: Starbucks Coffee café outlet in , Figure 25: First Starbucks Coffee drive-through outlet in Malaysia Setia Alam, Malaysia

Source: RHB Source: RHB

Starbucks Coffee FMCG products to roll out by end-2014. Post-acquisition, BStarbucks will be granted a license to distribute Starbucks Coffee’s fast-moving consumer goods (FMCG) in Malaysia via supermarkets, convenience stores, hotels etc. While we understand that Starbucks Coffee FMCG products are available in Malaysia, they are sourced from a third party and not directly from SCI. The FMCG products that the group intends to bring in will have a longer shelf life, while being priced at levels that consumers would find favourable. We have not factored any earnings contribution from its FMCG arm into our forecasts as the planning for this endeavour has not firmed up yet at this juncture. In addition, we believe earnings contribution from this new business in FY15-17F will likely be negligible.

See important disclosures at the end of this report 13

Berjaya Food (BFD MK) 19 November 2014

More Than Just Coffee KRR Malaysia to contribute to BFood’s profitability. BFood holds the franchise rights to develop and operate the KRR brand in Malaysia, Indonesia and Cambodia. The rights were given by its holding company, Berjaya Corp (BC MK, NR), which acquired the global rights to the KRR brand in 2008. Despite the drop YoY in EBIT in FY14 due to an increase in labour costs, promotional costs as well as training expenses, KRR is still contributing to the profitability of BFood. The decline in EBIT margins over the years was due to rising operating costs that could not be offset by an increase in its food pricing. We also note that KRR’s pricing power is limited given the intense competition among the FSRs as well as the profile of its targeted customers, which are more susceptible to the rising living costs. However, we note that among its key competitors in Malaysia such as Nando’s and The Chicken Rice Shop, KRR Malaysia’s margins are still superior. Although management indicated that it will continue to expand KRR outlets in Malaysia, Indonesia and Cambodia, we expect flattish earnings contributions from KRR given the challenging operating environment.

Figure 26: KRR Malaysia’s sales and YoY sales growth Figure 27: KRR Malaysia’s EBIT and EBIT margins (%)

MYRm MYRm 120 25% 18 20%

16 18.2% 19% 100 19.1% 19.6% 20% 17.5% 18% 14 17.2% 80 17% 12 15% 15.5% 16% 11.3% 10 60 15% 8 95.7 96.1 10% 86.0 14% 40 6 71.9 13% 60.4 5% 4 20 11.2% 12% 0.4% 2 11% 10.4 12.6 15.6 14.8 10.7 0 0% 0 10% FY10 FY11 FY12 FY13 FY14 FY10 FY11 FY12 FY13 FY14

Source: Company data, RHB Source: RHB

Figure 28: Number and SSSG (%) of Malaysian KRR outlets Figure 29: A KRR restaurant in Mid Valley Megamall, Malaysia

90 10% 8% 80 8% 70 6% 6% 60 4% 50 4%

40 78 2% 69 30 64 53 0% 20 42 -2 % -2 % -2% 10

0 -4% FY10 FY11 FY12 FY13 FY14

Source: Company data Source: Company

See important disclosures at the end of this report 14

Berjaya Food (BFD MK) 19 November 2014

KRR’s Indonesian arm is still in the red. KRR’s Indonesian arm is still making losses as at FY14, largely due to higher operating costs from the lack of economies of scale as well as higher imported food costs from the appreciation of the USD against the IDR. Given its poor performance since entering into the Indonesian market, the group is shifting its strategy to focus on turning around its loss-making outlets before embarking on aggressive expansion in Indonesia. Although the Indonesian market offers huge earnings growth potential for the group in the long term, we believe it may take some time to reap the fruits of its labour. Meanwhile, we understand from manaagement that sales of KRR Indonesia are expected to reach a break-even point by FY16 from initiatives such as promotions, the opening of new restaurants in locations with high traffic and offering delivery services through channels like Foodpanda Indonesia and Room Service Deliveries.

Figure 30: KRR restaurant count in Indonesia and its SSSG (%) Figure 31: A KRR restaurant in Paris Van Java, Indonesia

30 0%

25 -2%

-4 % 20 -4%

15 -6%

24 10 -8% 16

5 9 -1 1 % -10%

0 -12% FY10 FY11 FY12FY13FY14

Source: RHB Source: Company

Expanding its regional footprint. This year, BFood expanded its regional footprint by making its maiden foray into Cambodia (for KRR). It opened its first store in AEON mall, Phnom Penh – which is also AEON Mall Cambodia Ptd Ltd’s first mall in Cambodia. Although we may not see an increase in earnings contribution from Cambodia due to its sheer market size, we are positive on its long-term prospects as Cambodia is an unsaturated market still. BFood also marked its entry into Brunei by opening its first outlet there in Feb 2014. Moving forward, the group plans to open six more KRR restaurants in Cambodia and 10 more Starbucks Coffee outlets in Brunei over the next five years.

Figure 32: A Starbucks Coffee café in Mabohai, Brunei Figure 33: A KRR restaurant in Cambodia

Source: The Brunei Times Source: Company

See important disclosures at the end of this report 15

Berjaya Food (BFD MK) 19 November 2014

Contributions from Jollibean to continue. BFood acquired Jollibean Foods Pte Ltd for MYR19m on 7 Dec 2012. YTD, it has 47 outlets in Singapore and two in Malaysia. Most of the outlets in Singapore are located in the shopping malls as well as the mass rapid transit (MRT) stations. Among the four brands (ie Sushi Deli, DanGo, Jollibean and Kopi Alley), Jollibean is the star, selling soya milk products. We believe BFood’s Jollibean arm will continue to contribute to the group’s profitability over the next few years on the back of its organic sales growth. We also understand from the management that it has plans to franchise the brand in the near future.

Figure 34: Number and SSSG of its Jollibean outlets (%) Figure 35: A Jollibean kiosk in Bugis Junction, Singapore

70 9% 10%

7% 8% 60 61 59 6% 50 4% 50 49 47 2% 40 0% -2% 30 -3% -2%

20 -4% -6% 10 -8% -8%

0 -10% FY10 FY11 FY12 FY13 FY14

Source: Company data Source: Company

See important disclosures at the end of this report 16

Berjaya Food (BFD MK) 19 November 2014

Financial Analysis Recent acquisition of the remaining 50% stake in BStarbucks. The MYR279.5m acquisition of the remaining 50% stake in BStarbucks by BFood was completed on 18 Sep 2014, funded by bank borrowings. The acquisition will likely result in an earnings boost to BFood, given that BStarbucks has always been the key earnings driver for BFood since its investment back in Jul 2012. For FY10-14, BStarbucks’ annual sales grew at strong double digits, on the back of an aggressive expansion of outlets and double-digit SSSG. In the same period, it also recorded a net margin improvement YoY, largely driven by economies of scale.

Figure 36: BStarbucks' revenue and YoY revenue growth (%) Figure 37: BStarbucks' earnings and net margins (%)

MYRm MYRm 600 28.7% 30% 27.7% 70 13% 26.7% 11.8% 500 60 11.6% 12% 25% 11.3% 11.0% 21.6% 400 20.2% 50 11% 20% 10.1% 17.5% 40 10% 300 9.3%

15% 30 9% 200 20 8% 7.3% 10% 100 10 7% 144.7 183.3 234.2 301.4 366.4 440.3 517.3 10.6 17.1 23.6 35.0 40.5 49.6 60.9 0 5% 0 6% FY11 FY12 FY13 FY14 FY15F FY16F FY17F FY11 FY12 FY13 FY14 FY15F FY16F FY17F

Source: Company data, RHB Source: Company data, RHB

Figure 38: Total Starbucks Coffee outlets in Malaysia

300

250 25 200 25 25 150 28 15 7 100 5

50

120 135 142 170 195 220 245 0 FY11 FY12 FY13 FY14 FY15F FY16F FY17F

No. of outlets Additions

Source: Company data, RHB

See important disclosures at the end of this report 17

Berjaya Food (BFD MK) 19 November 2014

♦ Earnings CAGR of 47.7% over the next Consolidation of BStarbucks to drive 47.7% 3-year earnings CAGR in FY14-17F. three years The completion of the acquisition of the remaining 50% equity in BStarbucks may see BFood’s FY15F topline spike by 155.5% YoY to MYR384.2m, reflecting seven months of full consolidation. For FY14-17F, we estimate a 3-year earnings CAGR of 47.7%, driven by the consolidation of BStarbucks and its expansion of Starbucks Coffee outlets. Starbucks Coffee is currently the leader in Malaysia’s coffeehouse franchise, achieving double-digit SSSG since FY2011. Moving forward, we expect the double-digit SSSG to be sustainable for the FY15-17F period.

Figure 39: Breakdown of BFood's revenue by brands Figure 40: Breakdown of BFood's revenue by country

100% 100% 2.9% 8% 9% 12.6% 8.4% 8.5% 13% 12% 90% 11.7% 90% 24.6% 3.5% 3.4% 25% 8.9% 4.9% 80% 80% 1% 70% 8.9% 70% 60% 60% 57% 71% 72% 50% 50% 100% 97.1% 86.8% 86.4% 87% 40% 78.5% 82.1% 40% 74% 30% 65.3% 30% 20% 20% 31% 10% 10% 21% 20% 0% 0% FY12 FY13 FY14 FY15F FY16F FY17F FY12 FY13 FY14 FY15F FY16F FY17F

KRR Starbucks Coffee Jollibean Malaysia Indonesia Singapore Brunei Cambodia

Source: Company data, RHB Source: Company data, RHB

Figure 41: Revenue and YoY revenue growth for FY12-17F Figure 42: PATAMI and its net margin (%)

MYRm MYRm 800 1.8 80 18% 155.5% 15.3% 15.1% 700 1.6 70 16%

1.4 12.6% 14% 600 60 12% 1.2 50 9.9% 500 9.4% 8.7% 10% 1 40 400 73.1 8% 64.3% 0.8 30 59.6 300 736.1 6% 0.6 20 4% 37.6% 33.5 200 23.3% 384.2 631.4 0.4 10 18.6 22.7 2% 16.6% 11.1 100 0.2 0 0% 121.9 150.4 88.6 FY12 FY13 FY14 FY15F FY16F FY17F 0 0 FY12 FY13 FY14 FY15F FY16F FY17F PATAMI PATAMI margin (%)

Source: Company data, RHB Source: Company data, RHB

See important disclosures at the end of this report 18

Berjaya Food (BFD MK) 19 November 2014

Figure 43: BFood’s financials and key assumptions FYE April FY13 FY14 FY15F FY16F FY17F Comments KRR Malaysia

Revenue 95.7 96.1 99.5 105.3 116.8

% change 0.4% 3.5% 5.9% 10.9%

No. of outlets at start of FY 64 69 78 85 92

No. of new outlets 5 9 7 7 7

Total no. of outlets at end-FY 69 78 85 92 99

EBIT 14.8 10.7 7.3 7.9 8.6

% change -27.4% -31.7% 8.0% 8.9%

% margin 15.5% 10.9% 7.2% 7.4% 7.2%

KRR Indonesia

Revenue 10.9 13.4 18.7 22.0 25.3

% change 23.2% 39.4% 17.6% 15.0%

No. of outlets at start of FY 9 16 24 34 40

Expansion may be less aggressive in FY16 and No. of new outlets 7 8 10 6 6 FY17 as management would focus on turning around its loss-making outlets Total no. of outlets at end-FY 24 34 40 46 52

EBIT -2.8 -4.6 -3.4 1.1 1.3

% change 61.7% -26.1% -132.7% 15.0%

% margin na na na 5.0% 5.0%

KRR Cambodia

Revenue na na 0.6 1.0 1.3

% change 60.0% 33.3%

EBIT na na 0.0 0.0 0.1

% change 166.7% 33.3%

% margin 3.0% 5.0% 5.0%

Jollibean

>100% sales growth in FY14 due to five months Revenue 15.3 37.0 45.0 53.2 62.8 of financial consolidation in FY13 % change 141.8% 21.6% 18.1% 17.9%

No. of outlets at start of FY 50 47 49 59 69

No. of new outlets -3 2 10 10 10

Total no. of outlets at end-FY 47 49 59 69 79

EBIT 1.5 2.1 2.7 3.5 4.1

% change 40.2% 30.0% 28.0% 17.9%

% margin 9.7% 5.6% 6.0% 6.5% 6.5%

Starbucks Coffee Malaysia Consolidated seven months of financial numbers Revenue 234.2 301.4 366.4 440.3 517.3 in FY15; full-year consolidation from FY16 onwards % change 28.7% 21.6% 20.2% 17.5%

No. of outlets at start of FY 135 142 170 195 220 No. of new outlets 7 28 25 25 25 Total no. of outlets at end-FY 142 170 195 220 245

~50% of BStarbucks’ COGS are denominated in USD/MYR 3.09 3.10 3.25 3.30 3.30 USD % change 0.3% 3.5% 2.8% 0.0%

We expect Arabica coffee bean prices to remain high until 2015 before declining in 2016, after ASP of Arabica coffee (USD/MT) 3,440 2,938 3,200 3,600 3,400 planted areas experienced the worst drought in decades in 2014 % change -14.6% 8.9% 12.5% -5.6%

Rental rate per store (MYR) 25,966 26,474 27,798 29,188 30,647 % change 2.0% 5.0% 5.0% 5.0%

EBIT 30.9 50.0 57.8 69.9 85.8

% change 61.8% 15.7% 20.9% 22.7%

% margin 13.2% 16.6% 15.8% 15.9% 16.6% See important disclosures at the end of this report 19

Berjaya Food (BFD MK) 19 November 2014

Starbucks Coffee Brunei

Revenue na 1.7 4.5 7.5 10.5

% change 170.0% 66.7% 40.0%

EBIT na 0.3 0.7 1.2 1.7

% change 157.6% 66.7% 40.0%

% margin 17.3% 16.5% 16.5% 16.5%

Others Revenue 0.0 2.2 2.2 2.2 2.2 Management fee income

Unallocated corporate expenses, income from EBIT -1.1 -1.3 0.0 0.0 0.0 investing activities Source: Company data, RHB

Gearing up but risk is minimal. The group has historically been in a net cash position. As the MYR279.5m acquisition of the remaining 50% interest in BStarbucks was funded by debt, we estimate its gross debt (ST + LT) to balloon to MYR275m in FY15 (after paring down some of its debt in FY14), which would result in a net debt position from FY15 going forward. We estimate its gearing ratio to rise to 0.7x for FY15 from 0.04x as of FY14. However, its expected strong cash flow from operations of an average MYR83.3m per annum for FY15-17F should pare down its gearing level to 0.5x by FY17F.

Figure 44: BFood’s cash flow from operations Figure 45: BFood’s gross debt and gearing

MYRm MYRm x 120 300 0.7 0.8

0.7 100 250 0.6 0.6 200 80 0.5 0.5

150 0.4 60 275.0 245.0 0.3 95.2 100 200.0 40 77.0 77.8 0.2 50 0.0 0.1 20 0 6.0 0.0 13.6 12.1 10.6 FY12 FY13 FY14 FY15F FY16F FY17F 0 FY12 FY13 FY14 FY15F FY16F FY17F Gross debt (LHS) Gearing (RHS)

Source: Company data, RHB Source: Company data, RHB

See important disclosures at the end of this report 20

Berjaya Food (BFD MK) 19 November 2014

Dividend payout policy. The group has an official dividend policy that pays up to 40% of earnings to its shareholders. However, historically, its dividend payout ratio has been between 42% and 57% in the past four financial years. We estimate a payout ratio of 50% for FY15-17F, taking into consideration the group’s net gearing position as well as the need to fund its expansion of F&B outlets.

Figure 46: BFood's DPS with respective payout ratios

sen

12 57.0% 60% 50.0% 50.0% 50.0% 50.0% 10 50% 42.0% 8 40%

6 30% 9.6 4 7.8 20%

4.5 4.3 4.4 2 3.5 10%

0 0% FY12 FY13 FY14 FY15F FY16F FY17F

DPS (LHS) Payout ratio (RHS)

Source: Bloomberg

See important disclosures at the end of this report 21

Berjaya Food (BFD MK) 19 November 2014

Company Background A leading F&B player in Malaysia. BFood was incorporated in Malaysia on 21 Oct 2009 and was subsequently listed on the Main Board of Bursa Malaysia on 8 Mar 2011. The F&B brands currently under BFood are KRR, Starbucks Coffee, Jollibean, Sushi Deli, Kopi Alley and DanGo.

Figure 47: BFood’s corporate structure

Source: Company data

Tapping into various growth markets since 2011. In 2012, BFood opened its first KRR outlet in Indonesia under PT Boga via a JV with PT Mitra Samaya, PT Harapan Swasti Sentosa and PT Boga Lestari Sentosa, Indonesia. To date, BFood has 24 KRR outlets in Indonesia. In line with BFood’s plan to expand its regional presence, the group bought a 100% equity stake in Jollibean Food Pte Ltd in Dec 2012, whereby it holds the sole and exclusive rights to develop, operate and manage the brands Jollibean, Sushi Deli, Kopi Alley and DanGo. In 2013, the group entered into the Brunei market via Berjaya Food Supreme SB to undertake the operations of Starbucks Coffee cafes in Brunei. This year, it opened its first KRR outlet in Cambodia via a JV with CE Roosters Ltd, a local partner in Cambodia and also acquired the remaining 50% equity interest in BStarbucks from SCI.

Figure 48: BFood’s acquisitions since listing Date Company Format Market Investment Remarks Jan-12 PT Boga KRR restaurant Indonesia IDR5.5bn (MYR1.9m) 51% stake Jul-12 Berjaya Starbucks Coffee Company Starbucks Coffee outlet Malaysia MYR71.7m 50% stake Dec-12 Jollibean Foods Pte Ltd Outlet, stall, kiosk Singapore, Malaysia MYR19m 100% stake Oct-13 Berjaya Food Supreme Starbucks Coffee outlet Brunei BND2.4m (MYR6.2m) 80% stake Jul-14 Berjaya Roasters (Cambodia) Ltd KRR restaurant Cambodia KHR1.4bn (MYR1.1m) 70% stake Acquisition of the Jul-14 Berjaya Starbucks Coffee Company Starbucks Coffee outlet Malaysia MYR279.5m remaining 50% stake Source: Company data

See important disclosures at the end of this report 22

Berjaya Food (BFD MK) 19 November 2014

Figure 49: BFood’s F&B brands and YTD number of outlets in each country of operation

Malaysia Indonesia Singapore Brunei Cambodia

88 restaurants 24 restaurants Nil Nil 1 restaurant

175 outlets Nil Nil 2 outlets Nil

2 outlets Nil 32 outlets Nil Nil

Nil Nil 12 outlets Nil Nil

Nil Nil 2 outlets Nil Nil

Nil Nil 1 outlet Nil Nil

Source: Company data

Figure 50: BFood's key management Appointment Profile

Dato' Robin Tan was appointed as a director and executive chairman since May 2010. He joined Dato' Robin Tan Executive chairman Berjaya Group in 1995 as an executive and has since been involved in various business divisions within the group. He is also the chairman and chief executive officer of Berjaya Corp.

Dato' Lee Kok Chuan was appointed a director and CEO of BFood since May 2010. He joined the Berjaya Group in 1994, and has more than 10 years of experience in accounting, auditing and Dato' Lee Kok Chuan Chief executive officer corporate services. He was the key person who turned the Kenny Rogers Roasters business around in Malaysia when it was on the verge of a collapse in 1998.

Mr Tan Thiam Chai was appointed to the board as a non-independent non-executive director since Tan Thiam Chai Chief financial officer May 2010. He joined Berjaya Group as a finance manager in 1991 and has since been involved in other operations of the group, such as finance, internal audit etc.

Source: Company data

See important disclosures at the end of this report 23

Berjaya Food (BFD MK) 19 November 2014

Appendix

Figure 51: Arabica coffee bean spot prices have risen considerably since early 2014. The cost of Arabica coffee makes up ~25% of BStarbucks’ COGS USD/MT 1Q13 6,000 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 average QTD average average average average average average average USD3,163 USD2,919 USD2,611 USD2,430 USD3,382 USD4,084 USD3,998 USD4,575 5,000

4,000

3,000

2,000

1,000

0 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14

Source: Bloomberg

Figure 52: USDA class 1 milk spot price on a steady rise since 2H13. It makes up ~25% of BStarbucks’ COGS USD/cwt 29.0

27.0

25.0

23.0

21.0

19.0

17.0

15.0 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

Source: Bloomberg

Figure 53: Soybean spot price declined considerably since Jun 2014. It accounts for ~20% of Jollibean’s COGS USD/bushel 20.0

18.0

16.0

14.0

12.0

10.0

8.0 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14

Source: Bloomberg

See important disclosures at the end of this report 24

Berjaya Food (BFD MK) 19 November 2014

Financial Exhibits

Profit & Loss (MYRm) Apr-13 Apr-14 Apr-15F Apr-16F Apr-17F Total turnover 122 150 384 631 736 Cost of sales (74) (91) (195) (297) (341) Gross profit 48 60 190 335 395 Gen & admin expenses (47) (65) (161) (265) (309) Other operating costs 11 12 13 14 16 Operating profit 12 7 41 84 102 Operating EBITDA 20 15 59 114 131 Depreciation of fixed assets (7) (7) (18) (30) (29) Operating EBIT 12 7 41 84 102 Net income from investments 9 17 8 - - Interest expense - (0) (7) (5) (5) Pre-tax profit 21 25 42 79 97 Taxation (4) (4) (11) (19) (23) Minority interests 1 3 2 (1) (1) Profit after tax & minorities 19 23 34 60 73 Reported net profit 19 23 34 60 73 Recurring net profit 19 23 34 60 73

Source: Company data, RHB

Cash flow (MYRm) Apr-13 Apr-14 Apr-15F Apr-16F Apr-17F Operating profit 12 7 41 84 102 Depreciation & amortisation 7 7 18 30 29 Change in working capital (6) 0 33 (8) (3) Other operating cash flow 2 2 3 (5) (5) Operating cash flow 15 17 95 101 123 Interest paid - (0) (7) (5) (5) Tax paid (3) (6) (11) (19) (23) Cash flow from operations 12 11 77 78 95 Capex (11) (16) (38) (20) (25) Other investing cash flow (32) 3 (272) 5 5 Cash flow from investing activities (42) (13) (310) (16) (21) Dividends paid (7) (10) (17) (30) (37) Proceeds from issue of shares 22 5 22 - - Increase in debt - 6 269 (30) (45) Other financing cash flow (1) 1 4 - - Cash flow from financing activities 13 2 279 (60) (82) Cash at beginning of period 37 19 20 65 67 Total cash generated (17) (0) 45 2 (7) Forex effects (0) 1 - - - Implied cash at end of period 19 20 65 67 60

Source: Company data, RHB

See important disclosures at the end of this report 25

Berjaya Food (BFD MK) 19 November 2014

Financial Exhibits

Balance Sheet (MYRm) Apr-13 Apr-14 Apr-15F Apr-16F Apr-17F Total cash and equivalents 19 20 65 67 60 Inventories 4 4 12 18 20 Accounts receivable 18 19 40 66 77 Total current assets 41 43 116 151 158 Total investments 80 94 - - - Tangible fixed assets 30 39 136 126 122 Intangible assets 16 16 455 455 455 Total other assets 0 0 0 0 0 Total non-current assets 126 150 591 581 576 Total assets 167 193 707 731 734 Short-term debt - 6 5 5 5 Accounts payable 15 17 45 69 79 Other current liabilities 4 3 12 12 12 Total current liabilities 18 26 62 86 96 Total long-term debt - 0 270 240 195 Other liabilities 5 5 5 5 5 Total non-current liabilities 5 5 275 245 200 Total liabilities 23 31 337 331 297 Share capital 131 135 157 157 157 Retained earnings reserve 44 57 240 270 306 Other reserves (32) (30) (26) (26) (26) Shareholders' equity 143 161 371 401 437 Minority interests 1 1 (1) (0) 0 Other equity (0) (0) (0) 0 - Total equity 144 162 370 400 437 Total liabilities & equity 167 193 707 731 734

Source: Company data, RHB

Key Ratios (MYR) Apr-13 Apr-14 Apr-15F Apr-16F Apr-17F Revenue growth (%) 37.6 23.3 155.5 64.3 16.6 Operating profit growth (%) (15.6) (41.4) 468.5 103.3 21.4 Net profit growth (%) 67.4 21.7 47.9 77.8 22.5 EPS growth (%) (8.0) 18.0 4.5 77.8 22.5 Bv per share growth (%) 39.9 9.7 62.3 8.0 9.1 Operating margin (%) 10.1 4.8 10.7 13.2 13.8 Net profit margin (%) 15.3 15.1 8.7 9.4 9.9 Return on average assets (%) 15.1 12.6 7.5 8.3 10.0 Return on average equity (%) 18.7 14.9 12.6 15.5 17.4 Net debt to equity (%) (13.4) (8.4) 56.9 44.4 31.9 DPS 0.03 0.04 0.04 0.08 0.10 Recurrent cash flow per share 0.05 0.04 0.20 0.20 0.25

Source: Company data, RHB

See important disclosures at the end of this report 26

Berjaya Food (BFD MK) 19 November 2014

SWOT Analysis

• Starbucks Coffee is a strong global franchise brand • Intense competition in • Strong and experienced management the F&B industry • A slowdown in consumer spending would have adverse effects on the F&B industry • Emerging markets like Indonesia and Cambodia offer huge earnings growth potential in the long term

• Strong earnings growth is solely dependent on Starbucks Coffee • Costs are affected by rental rates as well as volatility in forex and raw material prices

P/E (x) vs EPS growth P/BV (x) vs ROAE

50 90% 7 20% 45 79% 6 17% 40 68% 35 57% 5 14%

30 46% 4 11% 25 35% 20 24% 3 9% 15 13% 2 6% 10 2% 1 3% 5 -9% 0 -20% 0 0% 13 - Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan 13 Jan-14 Jan-15 Jan-16 Jan-17

P/E (x) (lhs) EPS growth (rhs) P/B (x) (lhs) Return on average equity (rhs)

Source: Company data, RHB Source: Company data, RHB

Company Profile Berjaya Food develops and operates the Kenny Rogers Roasters restaurant chain as well as Starbucks Coffee café chain in Malaysia and other Southeast Asian countries. The company also develops and operates Jollibean Foods, which consists of Jollibean, Kopi Alley, Sushi Deli and DanGo brand in Singapore and Malaysia.

See important disclosures at the end of this report 27

Berjaya Food (BFD MK) 19 November 2014

Recommendation Chart

Price Close 3.67

3.17

2.67

2.17

1.67

1.17

0.67

0.17 Mar-11 Feb-12 Jan-13 Jan-14

Source: RHB, Bloomberg

Date Recommendation Target Price Price 2014-11-19

Source: RHB, Bloomberg

See important disclosures at the end of this report 28

RHB Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

Disclosure & Disclaimer

All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared for information purposes only. It is intended for circulation to the clients of RHB and its related companies. Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This report is for the information of addressees only and is not to be taken in substitution for the exercise of judgment by addressees, who should obtain separate legal or financial advice to independently evaluate the particular investments and strategies.

This report may further consist of, whether in whole or in part, summaries, research, compilations, extracts or analysis that has been prepared by RHB’s strategic, joint venture and/or business partners. No representation or warranty (express or implied) is given as to the accuracy or completeness of such information and accordingly investors should make their own informed decisions before relying on the same.

RHB, its affiliates and related companies, their respective directors, associates, connected parties and/or employees may own or have positions in securities of the company(ies) covered in this research report or any securities related thereto, and may from time to time add to, or dispose off, or may be materially interested in any such securities. Further, RHB, its affiliates and related companies do and seek to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell them or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory or underwriting services for or relating to such company(ies), as well as solicit such investment, advisory or other services from any entity mentioned in this research report.

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Malaysia

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Singapore

This report is published and distributed in Singapore by DMG & Partners Research Pte Ltd (Reg. No. 200808705N), a wholly-owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group) and OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is referred to as “RHBIB”, which in turn is a wholly- owned subsidiary of RHB Capital Berhad). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG & Partners Securities Pte Ltd may have received compensation from the company covered in this report for its corporate finance or its dealing activities; this report is therefore classified as a non-independent report.

As of 17 November 2014, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd do not have proprietary positions in the securities covered in this report, except for: a) -

As of 17 November 2014, none of the analysts who covered the securities in this report has an interest in such securities, except for: a) -

Special Distribution by RHB

Where the research report is produced by an RHB entity (excluding DMG & Partners Research Pte Ltd) and distributed in Singapore, it is only distributed to "Institutional Investors", "Expert Investors" or "Accredited Investors" as defined in the Securities and Futures Act, CAP. 289 of Singapore. If you are not an "Institutional Investor", "Expert Investor" or "Accredited Investor", this research report is not intended for you and you should disregard this research report in its entirety. In respect of any matters arising from, or in connection with this research report, you are to contact our Singapore Office, DMG & Partners Securities Pte Ltd

Hong Kong

This report is published and distributed in by RHB OSK Securities Hong Kong Limited (“RHBSHK”) (formerly known as OSK Securities Hong Kong Limited), a subsidiary of OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is referred to as “RHBIB”), which in turn is a wholly-owned subsidiary of RHB Capital Berhad.

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RHBSHK, RHBIB and/or other affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject company. RHBSHK, RHBIB and/or other affiliates may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the subject company.

Risk Disclosure Statements

The prices of securities fluctuate, sometimes dramatically. The price of a security may move up or down, and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling securities. Past performance is not a guide to future performance. RHBSHK does not maintain a predetermined schedule for publication of research and will not necessarily update this report

Indonesia

This report is published and distributed in Indonesia by PT RHB OSK Securities Indonesia (formerly known as PT OSK Nusadana Securities Indonesia), a subsidiary of OSK Investment Bank Berhad, Malaysia, which have since merged into RHB Investment Bank Berhad, which in turn is a wholly-owned subsidiary of RHB Capital Berhad.

Thailand

This report is published and distributed in Thailand by RHB OSK Securities (Thailand) PCL (formerly known as OSK Securities (Thailand) PCL), a subsidiary of OSK Investment Bank Berhad, Malaysia, which have since merged into RHB Investment Bank Berhad, which in turn is a wholly-owned subsidiary of RHB Capital Berhad.

Other Jurisdictions

In any other jurisdictions, this report is intended to be distributed to qualified, accredited and professional investors, in compliance with the law and regulations of the jurisdictions.

Kuala Lumpur Hong Kong Singapore

Malaysia Research Office RHB OSK Securities Hong Kong Ltd. (formerly known DMG & Partners RHB Research Institute Sdn Bhd as OSK Securities Securities Pte. Ltd. Level 11, Tower One, RHB Centre Hong Kong Ltd.) 10 Collyer Quay Jalan Tun Razak 12th Floor #09-08 Ocean Financial Centre Kuala Lumpur World-Wide House Singapore 049315 Malaysia 19 Des Voeux Road Tel : +(65) 6533 1818 Tel : +(60) 3 9280 2185 Central, Hong Kong Fax : +(65) 6532 6211 Fax : +(60) 3 9284 8693 Tel : +(852) 2525 1118 Fax : +(852) 2810 0908 Jakarta Phnom Penh

PT RHB OSK Securities Indonesia (formerly known as RHB OSK (China) Investment Advisory Co. Ltd. RHB OSK Indochina Securities Limited (formerly PT OSK Nusadana (formerly known as OSK (China) Investment known as OSK Indochina Securities Limited) Securities Indonesia) Advisory Co. Ltd.) No. 1-3, Street 271 Plaza CIMB Niaga Suite 4005, CITIC Square Sangkat Toeuk Thla, Khan Sen Sok 14th Floor 1168 Nanjing West Road Phnom Penh Jl. Jend. Sudirman Kav.25 Shanghai 20041 Cambodia Jakarta Selatan 12920, Indonesia China Tel: +(855) 23 969 161 Tel : +(6221) 2598 6888 Tel : +(8621) 6288 9611 Fax: +(855) 23 969 171 Fax : +(6221) 2598 6777 Fax : +(8621) 6288 9633 Bangkok

RHB OSK Securities (Thailand) PCL (formerly known as OSK Securities (Thailand) PCL) 10th Floor, Sathorn Square Office Tower 98, North Sathorn Road,Silom Bangrak, Bangkok 10500 Thailand Tel: +(66) 2 862 9999 Fax : +(66) 2 108 0999

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