Collins Foods: Value to be unlocked

About the author:

James Barker
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By James Barker
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Date posted:
27 March 2019, 1:46 PM
Sectors Covered:
Retail, Technology and Telecommunications

Some recent KFC Australia quarterly prints...

Yum! Brands (YUM) and Restaurant Brands (RBD) have recently reported positive quarterly sales prints for their KFC Australia operations. RBD's 4Q sales showed +6.9% same store sales (SSS) in their KFC Australia (NSW) operations. This was a meaningful acceleration from the +2.4% printed in the prior quarter (Sep-Dec). While we note that RBD's KFC Australia operations have typically reported higher SSS growth given the exposure to the outperforming NSW region, the acceleration/delta between the periods is of key interest to us.

Yum! recently reported its 4Q18 (Oct-Dec) sales, which showed that total KFC Australia 4Q sales was 6%. This sales growth is total (not SSS) and is partially backwards-looking, however it's a hopeful read-through for Collins Foods (CKF) given they represent c30% of KFC Australia's store footprint. In 1H19, CKF reported 3.1% SSS growth while Yum! reported KFC Australia sales +6% for the same period.

...bodes well for CKF's KFC Australia performance

The above data points bode well for CKF's KFC Australia SSS performance during 2H19. At its 1H19-result, CKF noted its 2H KFC Australia trading was 'slightly under 2%'. We expect this has now rebounded (similar to RBD's 3Q/4Q performance) and forecast FY19 KFC Australia SSS growth of +3% (+3.1%/+2.9% 1H/2H). We also note that CKF is cycling a weaker 2H (SSS +0.8% the previous corresponding period) which should assist the SSS performance.

We take a look at the European opportunity

Clearly there is a meaningful medium-term opportunity for KFC Europe if successfully executed. Historical commentary from Yum! has provided aspirational targets for its KFC footprint in each region:

  • Germany – 500 stores over the next 5-7 years
  • Netherlands – 150-200 stores over time

While there are a number of operators within the regions, clearly Collins Foods will play a significant part in these rollouts. We expect that Europe remains challenging in the short term, however a return to sustainable, positive SSS growth could provide a medium-term catalyst to a more aggressive rollout, ahead of forecasts.

Investment view

We have made 0.5-2% earnings per share upgrades in FY19-21F, primarily reflecting higher KFC Australia assumptions (SSS growth and margins). We believe there is meaningful value to be realised looking at Collins Foods (CKF) on a sum of the parts (SOTP) basis. If we assume the base KFC Australia division (less overheads) is worth 10-11.5x FY20F EV/EBITDA, value KFC Europe at cost price (approximately A$106m), and attribute no value to Taco Bell/Sizzler, we derive a valuation range of A$7.71-$9.02 per share.

The most recent transaction in the market (RBD-NZ takeover) valued the group at approximately 12.5x EV/EBITDA vs CKF's current trading multiple of approximately 8.5x EV/EBITDA. Incorporating a SOTP methodology into our blended valuation (PE, DCF, SOTP) which, in addition to a roll-forward of our DCF/PE valuations, sees us increase our share price target and upgrade our recommendation from Hold to Add.

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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