KFC Holdings (Malaysia) Bhd
(Oct 20, RM3.20)
Initiate coverage at RM3.24 with neutral call and target price of RM3.43: We are initiating coverage on KFC Holdings (Malaysia) Bhd (KFC) with a target price (TP) of RM3.43 and a “neutral” call. We derive our TP by pegging a 20% premium to KFC’s three-year average PER of 13 times to FY11 EPS of 22 sen.
Total return of 7.9% (including 2% dividend yield) is commendable thanks to: (i) KFC’s strong expansion drive in terms of the number of restaurants, locally and regionally; (ii) new market penetration in India, which is expected to boost KFC’s revenue growth; (iii) encouraging consumer sentiment outlook underpinned by higher disposable income thanks to tame inflation; and (iv) strong economic outlook for 2010 and 2011 (BIMB Securities 2010 GDP forecast: 6.7%; 2011: 5.7%).
KFC has a fully integrated business model with operations and market reach spanning the entire country. Its integrated business model includes: (i) poultry processing plant, (ii) feed mill, and (iii) chicken farm. KFC announced last March that it is going to invest about RM10 million in a farm in Sedenak, Johor. It will be used to supply chicken to its third processing plant located in Bandar Tenggara, Johor. In addition, its Bandar Tenggara processing plant will receive chicken supply from its 10 contract farmers in Johor.
KFC has received approval to open restaurants from YUM! Brands in Pune and Mumbai (both in India). Both cities are located in the third largest state in India with a combined population of 100 million. Note that KFC is currently running 79 restaurants in India, which include 37 restaurants by YUM! Brands (directly) and two by KFC Holdings. KFC is expecting to open eight new restaurants this year while looking to acquire two existing restaurants from other KFC franchisees. — BIMB Securities Research, Oct 20
This article appeared in The Edge Financial Daily, October 21, 2010.
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