Company Name: KFC HOLDINGS (M) BHD
|Research House: RHB||Price Call: BUY||Target Price: 3.50|
KFC Holdings (M) Bhd
(Oct 13, RM3.31)
Maintain outperform at 3.23 with fair value of RM3.50: The management estimates that for KFCH's Indian operations to break even, it would need about 30 to 35 outlets, which we believe will be achieved by mid- to end-2013. KFCH has 10 outlets in India, which is expected to grow to 15 to 17 by end-FY11, in line with our estimates. KFCH is targeting to have 25 stores in India by end-2012. Despite the gloomy global economic outlook, we understand that KFCH is not planning to slow down its expansion plans in India.
KFCH's focus for Malaysia is to open more drive-thru outlets. Currently, out of the 528 existing outlets, KFCH has 45 drive-thrus. Year-to-date KFCH has opened 13 outlets, of which six are drive-thrus. For FY11, KFCH aims to open 12 drive-thrus out of its 25 to 28 overall targeted store openings. It plans to open more outlets on the east coast of Peninsular Malaysia and in east Malaysia.
For FY12 onwards, we understand KFCH's plans to open 12 to 15 outlets per year, lower than our current forecast of 25. We have adjusted downwards our new store assumptions to 15 per year for FY12/FY13.
Despite the slowdown in the global economy, we understand that KFCH expects its top line outlook to remain resilient for FY12. Although the management does expect a slowdown in revenues, it has strategies in place to mitigate this through the introduction of value propositions for customers such as its RM4.50 meal.
In the last economic downturn of 2008/09, there was a noticeable slowdown in revenue growth in FY09, which grew by 5.4% year-on-year, a significant slowdown given that FY08 top line grew by 26% y-o-y. The drop in revenue in FY09 was a result of a slowdown in consumer spending growth, which slowed to 0.7% y-o-y (from +8.7% y-o-y in FY08).
Risks include: (i) bird/swine flu escalation; (ii) escalation of corn and soyabean prices, which would eat into margins; and (iii) deteriorating consumer spending power, resulting in lower same-store sales (SSS) growth.
Our FY12/FY13 earnings forecasts have been revised downwards by between 0.8% and 2.2% after imputing a lower number of new outlet openings of 15 per year in Malaysia (from 25 previously).
We expect KFCH's top line and earnings outlook to remain stable despite the cloudy economic outlook, as it is operating in a resilient segment of the food and beverage sector. While there is still downside risk to its revenues if the economy falls to worse than expected levels, the management expects a single-digit revenue decline at most.
Margins are likely to remain stable, or potentially higher, in light of declining raw material prices. As such, we reiterate our 'outperform' call on the stock, with an unchanged fair value of RM3.50 based on 14.5 times FY12 earnings per share. ' RHB Research, Oct 13
This article appeared in The Edge Financial Daily, Ocotber 14, 2011.