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.
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.
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