Berjaya Food’s restructuring could trigger positive re-rating
KUCHING: Berjaya Food Bhd’s (Berjaya Food) restructuring to rationalise Kenny Rogers Roasters (KRR) could trigger a positive re-rating, in the research arm of Kenanga Investment Bank Bhd’s (Kenanga Research) view, as a pure Starbucks play.
According to Kenanga Research, as of the first nine months of 2016 (9M16), Berjaya Food registered profit before tax (PBT) growth of 12.5 per cent to RM28.8 million thanks to the full consolidation of Berjaya Starbucks (starting the second quarter of 2015 (2Q15)) which recorded 9M16 Same Store Sales Growth (SSSG) of 4.4 per cent.
Kenanga Research noted that year to date ( YTD), the group has expanded its total number of stores by 12 stores to 374 stores (17 opened, five closed) with majority ( 13 stores) of the expansion focused on BStarbucks.
As KRR remains the main drag on Berjaya Food earnings growth, the research arm is not surprised if the group is looking to rationalize the flagging business which has presence in Malaysia and Indonesia.
Kenanga Research reckoned that loss-making outlets that have slim hope of turnaround should be closed down and the group may also need to adopt new pricing strategy to improve the appeal of KRR to its customers.
Should this anticipation materialise, the research arm believed the losses in KRR will be narrowed and Berjaya Food will be a more Starbucksconcentrated food and beverage (F&B) company.
Besides, it also did not rule out that the group may dispose KRR if and when opportunities arise and, of course, with a right pricing.
Kenanga Research noted that circa 40 per cent of Berjaya Starbucks’ cost of goods sold is imported content denominated in US dollar.
“Thus, the strengthening of US dollar in 9M16 had inflated the costs of BStarbucks and hence the slower earnings growth,” the research arm said.
The research arm has however, pointed out that earnings margin moving forward might improve if the ringgit proves able to strengthen against US dollar (YTD gain of three per cent).
Kenanga Research said that according to Berjaya Food’s annual report, a 10 per cent strengthening in ringgit could increase the group’s financial year 2015 ( FY15) net profit by eight per cent.
“Hence, we think Berjaya Food can also be a viable proxy to the strengthening of ringgit as it derives its sales revenue primarily ( 90 per cent) from Malaysia,” the research arm said.
All in, Kenanga Research had a ‘trading buy’ on Berjaya Food with fully diluted fair value of RM2.30 per share.