We maintain our BUY call on Berjaya Food (BFood) with a lower DCF-derived fair value (FV) of RM1.20/share (from RM1.25/share previously), which implies a FY23F PE of 18x – 0.5 SD above its 3- year mean of 16x. Our FV reflects an unchanged 3% premium based on an ESG rating of 4 stars.
BFood’s 9MFY23 earnings of RM86mil missed expectations, accounting for 62% - 63% of our and consensus estimates. The variance was mainly due to higher operating costs (+24% YoY), which were inflated by escalating raw material costs, absence of rental rebates as well as the implementation of higher minimum wage. This led to a 3%-point deterioration of the group’s operating margin. On a positive note, 9MFY23 revenue was within expectations at 79% of our forecast and 74% of consensus.
We raised FY23F revenue by 3% as net new stores exceeded our expectations. We also increased FY24F-FY25F store opening assumption as guided by management (40 – 45 new stores in 2024 vs. 35 – 40 in 2023), bringing revenue up by 1% - 2%. However, we cut earnings by 16% for FY23F and 19% for FY24F-FY25F to factor in the increase in operating expenses as price of coffee robusta has risen by 15% and sugar 7% since December 2022.
The group declared a higher 3 rd interim dividend of 0.5 sen per share during the quarter under review, bringing its total 9MFY23 dividend to 3.0 sen per share, in line with our expectations.
YoY, the group’s 9MFY23 revenue rose by 20% on the back of higher same-store-sales growth (SSSG) of nearly 8% on average from Starbucks coupled with additional openings of cafes (+34 new stores YoY) to 379 stores as at end-3QFY23. Nevertheless, 9MFY23 earnings increased only 5% YoY owing to a squeeze in operating margin amid higher raw material costs.
Similarly, 3QFY23 earnings of RM16mil halved YoY as margin was pressured by higher operating costs (+21% YoY) albeit a higher revenue of 8% YoY.
QoQ, 3QFY23 bottomline fell by 55% as topline sank 10% in the absence of festive and school holiday sales together with higher operating costs which cut EBIT margin by 8%-point.
We remain positive on BFood’s near-to-medium term outlook backed by its strong retail network coupled with strong brand equity and solid market positioning.
We gather that another round of price hike is not on the cards yet, despite higher raw material costs. Instead, the group will focus on launching more new products and strategic cost rationalisation to cushion the inflationary impact as well as turning around lossmaking divisions. All in, we believe these contributed to samestore-sales growth (SSSG) of 0.2% - 0.5% in 3QFY23.
The group currently trades at an attractive FY23F PE of 12x, 25% lower than its 3-year mean.
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