Stock Name: KFC
Company Name: KFC HOLDINGS (M) BHD
Research House: RHB
KFC Holdings (M) Bhd
(April 27, RM3.71)
Downgrade to underperform at RM3.70 with revised fair value of RM3.74 (from RM3.85): After our recent meeting with management, we understand that KFCH's new store opening target for Malaysia has been trimmed to 25 to 28 stores per year for FY11/13 (from 35 to 40 previously).
KFCH has 521 stores (end-FY10: 515) in Malaysia and has been aggressively expanding, opening 33 to 40 stores per year for the last five years.
The reason for the slowdown of store openings is partly due to the lack of supply of trained full-time employees. Note that approximately 70% of KFCH's employees are part-time, which includes secondary school students during school holidays.
Another reason for the slowing down of new store openings is the fact that due to the large number of stores already in Malaysia, we understand that KFCH is finding it slightly more challenging to obtain suitable locations for new stores.
Despite the slowdown in store openings in Malaysia, KFCH's expansion in India continues to be on track.
The company is currently running eight outlets in India, out of a total 110 KFCs in the country run by other Yum! franchisees. In terms of new outlets, KFCH's target remains the same as previously, with an expected nine or 10 store openings per year for FY11/12, in line with our original expectations.
We understand that KFCH is currently focusing on shopping malls for new outlets, and this will continue to be its focus in the near to medium term, while it will only look to opening stores in the rural or suburban areas in the long term.
Given the concerns over the rising cost of commodities, we were assured by management that KFCH's raw materials (corn and soy), which account for 10% to 12% of cost of sales, would not cause any significant margin erosion as the rise in costs could be passed down to consumers.
KFCH raised its selling prices across the board in November 2010 by 4% to 5% (based on our own estimates) to ease the pressure on margins.
The risks include: (i) escalation of bird/swine flu; (ii) a rise in corn and soybean prices which would eat into margins; and (iii) deteriorating consumer spending power resulting in lower same-store sales (SSS) growth.
Our FY11/13 earnings were revised downwards by 2.4% to 6.2% after taking into account: (i) the lower number of new outlets to be opened in Malaysia; (ii) higher FY13 growth assumption of 15% (from 10% previously) for its integrated poultry division; (iii) lower FY11/13 earnings before interest and taxes (Ebit) margins of 0.8% for its integrated poultry division; and (iv) lower capital expenditure of RM120 million per year (from RM200 million previously) for FY11/13 to incorporate the lower number of new stores to be opened.
Our fair value is reduced slightly to RM3.74 (from RM3.85 previously) based on unchanged 17 times FY11 earnings. Given the limited upside to our fair value as compared to the FBM KLCI, we are downgrading our call on the stock to an 'underperform'. ' RHB Research, April 27
This article appeared in The Edge Financial Daily, April 28, 2011.
Company Name: KFC HOLDINGS (M) BHD
Research House: RHB
KFC Holdings (M) Bhd
(April 27, RM3.71)
Downgrade to underperform at RM3.70 with revised fair value of RM3.74 (from RM3.85): After our recent meeting with management, we understand that KFCH's new store opening target for Malaysia has been trimmed to 25 to 28 stores per year for FY11/13 (from 35 to 40 previously).
KFCH has 521 stores (end-FY10: 515) in Malaysia and has been aggressively expanding, opening 33 to 40 stores per year for the last five years.
The reason for the slowdown of store openings is partly due to the lack of supply of trained full-time employees. Note that approximately 70% of KFCH's employees are part-time, which includes secondary school students during school holidays.
Another reason for the slowing down of new store openings is the fact that due to the large number of stores already in Malaysia, we understand that KFCH is finding it slightly more challenging to obtain suitable locations for new stores.
Despite the slowdown in store openings in Malaysia, KFCH's expansion in India continues to be on track.
The company is currently running eight outlets in India, out of a total 110 KFCs in the country run by other Yum! franchisees. In terms of new outlets, KFCH's target remains the same as previously, with an expected nine or 10 store openings per year for FY11/12, in line with our original expectations.
We understand that KFCH is currently focusing on shopping malls for new outlets, and this will continue to be its focus in the near to medium term, while it will only look to opening stores in the rural or suburban areas in the long term.
Given the concerns over the rising cost of commodities, we were assured by management that KFCH's raw materials (corn and soy), which account for 10% to 12% of cost of sales, would not cause any significant margin erosion as the rise in costs could be passed down to consumers.
KFCH raised its selling prices across the board in November 2010 by 4% to 5% (based on our own estimates) to ease the pressure on margins.
The risks include: (i) escalation of bird/swine flu; (ii) a rise in corn and soybean prices which would eat into margins; and (iii) deteriorating consumer spending power resulting in lower same-store sales (SSS) growth.
Our FY11/13 earnings were revised downwards by 2.4% to 6.2% after taking into account: (i) the lower number of new outlets to be opened in Malaysia; (ii) higher FY13 growth assumption of 15% (from 10% previously) for its integrated poultry division; (iii) lower FY11/13 earnings before interest and taxes (Ebit) margins of 0.8% for its integrated poultry division; and (iv) lower capital expenditure of RM120 million per year (from RM200 million previously) for FY11/13 to incorporate the lower number of new stores to be opened.
Our fair value is reduced slightly to RM3.74 (from RM3.85 previously) based on unchanged 17 times FY11 earnings. Given the limited upside to our fair value as compared to the FBM KLCI, we are downgrading our call on the stock to an 'underperform'. ' RHB Research, April 27
This article appeared in The Edge Financial Daily, April 28, 2011.
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