Collins Foods: Australia delivers the goods

About the author:

James Barker
Author name:
By James Barker
Job title:
Analyst
Date posted:
26 June 2019, 8:37 AM
Sectors Covered:
Retail, Technology and Telecommunications

FY19 result – a strong year of growth; core business performing

Collins Foods (CKF) reported FY19 revenue growth of 16.9% which converted to 20.3% EBITDA growth, in line with Morgans estimate. Same Store Sales (SSS) growth for KFC Australia of 3.7% was above our forecast of 3% while lower net store openings saw revenue in line. The Australian business' EBITDA margin benefited from this strong top-line result (opex leverage), 35 basis points ahead of our forecast and +70 basis points on the previous corresponding period.

KFC Europe came in well below expectations at both revenue and EBITDA due to -3.7% SSS growth and opex deleverage/new store opening costs.

Strong operating cash flow conversion (110%) saw the group's net leverage ratio fall below 1.9x and report a final dividend of 10.5 cents per share (FY19 dividend of 19.5 cents per share).

Solid start to FY20 – KFC Australia still strong; Europe improving

As expected, CKF did not provide FY19 guidance. However, it did note that SSS growth was:

  • +3.4% in KFC Australia;
  • 'slightly positive' in the Netherlands; and
  • +5% in Germany.

KFC Australia continues to perform well, with promotional/value mix resonating and growth in delivery assisting average selling prices. In Germany, a refresh of the brand and value product improvement has assisted SSS, with the last three months recording positive comps. The Netherlands is expected to benefit from a new Yum Chief Marketing Officer, which will shift the focus from promotions to more value offering.

CKF also provided store roll-out guidance for FY20, comprising 9-10 KFC Australia stores (up from 5-7 previously); 5-6 KFC Europe stores; and 10 Taco Bell stores by CY19-end. The group will close 2 under-performing German stores during FY20 which will provide a modest tailwind (we estimate A$0.6m).

Changes to forecasts

Changes to our EBITDA forecasts are negligible, while our Earnings Per Share forecasts fall by -2.9% in FY20, -3.8% in FY21 and -3.1% in FY22. This reflects a higher KFC Australia margin, offset by a lower KFC Europe, slightly higher tax rate and higher shares on issue. We now forecast +8% NPAT growth in FY20, +11% in FY21 and +12% in FY22, culminating in a 3-year NPAT growth CAGR of approximately 9%.

Investment view

We are attracted to CKF's growth prospects, including continued growth in the base KFC Australia business (albeit maturing); KFC Europe ramp-up and margin improvement; the roll-out of Taco Bell Australia; and potential upside from acquisitions. 

Following a recent share price rally, CKF is trading on approximately 18.6x FY20 PE. We think this is fair in the context of approximately 9% 3-year earnings CAGR. We have increased our share price target but move our rating to a Hold (previously Add). We note that CKF is likely to be included in the next ASX200 rebalance (Sept 19). 

More information

Morgans clients can login to view our detailed report and upgraded share price target for Collins Foods (CKF). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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