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Saturday, 17 June 2017

(The Star) Is the worst over for Berjaya Food?

Berjaya Food Bhd (BFood), a food and beverage company that operates a number of franchises, is not altogether in a sweet spot.

Its profitability has been under pressure, dragged down by non-performing businesses such as Kenny Rogers Roasters (KRR) and Jollibean.

Early this week, the company posted its maiden quarterly loss of RM3.4mil for the fourth quarter ended April 30, 2017.

There was an RM5.1mil impairment during the quarter due to the closure of its loss-making KRR stores in both Malaysia and Indonesia, bringing financial year 2017 (FY17) profitability lower by about half to RM11.3mil.

BFood also owns the Malaysian Starbucks franchise, a prized asset in its stable which contributes more than two-thirds to its revenue.

But this was not enough to counter the larger-than-expected losses from Indonesian and Malaysian KRR operations. The weak ringgit had also impacted its gross profit margins in recent quarters.

According to analysts, the KRR chain of restaurants in Malaysia and Indonesia continue to disappoint, as consumer sentiment remains weak and competition rife.

But its strategy to close loss-making outlets of the famous restaurant chain will help improve profitability.

“Short-term prospects do not look promising for the group. However, the group continues to close non-profitable KRR Malaysia and KRR Indonesia outlets, which bodes well for the future,” says Hong Leong Investment Bank (HLIB) in a report.

BFood, which is majority controlled by Berjaya Corp Bhd (BCorp), had a total of 100 KRR outlets in Malaysia and 17 in Indonesia as at April this year.

It closed a total of 16 KRR stores in FY17, seven in Indonesia and nine in Malaysia.

These closures are likely to help KRR Malaysia to return to profitability while reducing losses at KRR Indonesia, moving forward, say analysts.

Meanwhile, RHB Research notes: “We opine that if a successful disposal of the loss-making KRR business as a quick fix to remove the earnings drag were to materialise, this would be a potential re-rating catalyst for this stock.”

The research house adds that coming from a low base in FY17, it is hopeful for a year of recovery in both earnings and business in FY18 with the successful execution of its downsizing exercise and growth in the Starbucks business.

BFood’s growth driver is Starbucks, a brand which has strong global franchise value. Towards this end, it has been increasing the number of Starbucks outlets.

It opened 25 stores in FY17 and from the beginning of this year, raised prices of Starbucks beverages by about 8%-9%, depending on the type of beverage.

AmResearch notes that Starbucks’ demand is more resilient than it initially thought, posting a flat same-store sales growth (SSSG) despite higher average selling prices. It notes that after the implementation of the goods and services tax in 2015, SSSG has contracted by 7%.

The research firm anticipates that another 25 Starbucks stores will be opened in FY18, enjoying an SSSG of 2.0%.

BFood’s FY17 turnover ticked up 9.3% year-on-year to RM605.4mil, thanks to increased contribution from Starbucks on the back of a higher store count that totals roughly 250 Starbucks stores across the country including drive-thrus. It also has a handful of outlets outside Malaysia operated by BFood’s subsidiary, namely, in Brunei.

Furthermore, the research firm reckons that the strengthening of the ringgit against the US dollar will also alleviate margins, as 50% of raw material is purchased in the greenback.

For the time being, AmResearch says that BFood continues to see challenges in turning around its remaining segments of KRR and Jollibean.

“KRR Indonesia may only realise a turnaround in FY19, while store rationalisation is uncertain as leasing proves to be a limiting factor. On the other hand, KRR Malaysia should perform better heading into FY18F, seeing that it is at the tail-end of store closures. We expect Jollibean to face stiff competition in Singapore.”

Earlier in February, two funds – Norges Bank and UBS AG/London – ceased to be substantial shareholders of the stock.

BCorp, which is ultimately owned by Tan Sri Vincent Tan, owns 43.4% in BFood, whose share price was last traded at RM1.50 or down 5% year-to-date.

Analysts have a mixed call on the stock.

CIMB Research has reduced its call to a “reduce” from a “hold” with a lower end-2017 target price of RM1.38 due to the stock’s rich valuations. RHB Research has maintained its “buy” call, but revised its target price to RM2.08 from RM2.21 previously.