KFC Holdings : Maintain BUY at RM3.27 with revised TP RM3.58

KFCH on track to delight

KFC Holdings (M) Bhd
(Oct 15, RM3.26)
Maintain buy at RM3.27 with revised target price RM3.58 (from RM3): We raise our 2010/12 forecasts by 3% to 6% because of faster new store openings and improvements in KFC Holdings’ non-KFC store operations. There could also be good news from India by year-end as acquisitions are sought to quicken its expansion.

KFC’s new store openings in Malaysia crossed the 500 mark at end-2Q10. KFC now looks like crossing the 520 stores mark (+9.5% year-on-year) by end-2010. Coupled with an estimated same store sales growth of at least 3% y-o-y, we expect KFC Malaysia’s revenues to rise at least 10.7% y-o-y in 2010 (2009: +5.8%). Further, the recent decision by its closest rival in the fast food chain segment to raise prices for selected items is positive for KFC’s relative pricing and therefore consumer demand moving into 2011.

After 1H10’s cumulative 11.5% y-o-y revenue growth in its ancillary and integrated poultry divisions, we expect 2H10’s revenue growth to exceed 6% y-o-y in 2H, contributing 25% to 2010 group revenue. New capacity and new outlets introduced in 2009/11 have begun to bear fruit, although 2011 and 2012 may be more exciting years as economies of scale begin to have an impact.

While new store openings at KFC India are behind initial internal targets, we are encouraged that acquisitions are being pursued to spur economies of scale. It may be a while before KFC purchases its licensor’s stores that are already operational in India. Nevertheless, we are encouraged that KFC can also pursue other (single outlet) franchisees already in Mumbai and Pune. Any successful acquisition will be interpreted as a significant milestone by investors.

We reiterate our “buy” call with a higher discounted cash flow-based target price (TP) of RM3.58 (from RM3), (WACC: 6.9%; g: 1.8%) after raising our 2010/12 earnings by 3% to 6% but assuming full dilution from its warrants. At our new TP, KFC would trade at 16.5 times 2011 PER, in line with broader market valuations. — Maybank Investment Bank Research, Oct 15


This article appeared in The Edge Financial Daily, October 18, 2010.