Australia | Sep 14 2011
– Brokers pick up coverage on Collins Foods
– Both UBS and Deutsche Bank rate stock as a Buy
– Upside from continued solid same store sales growth
– New store openings, refurbishments should also grow earnings
By Chris Shaw
Collins Foods ((CKF)) is one of Australia's largest restaurant operators, controlling 119 KFC restaurants under franchise agreements and 26 Sizzler Restaurants as the owner of the Sizzler trademark in Australia and in 68 other countries.
Shares in Collins Foods listed on the ASX on August 4 and brokers are now picking up coverage, with both UBS and Deutsche Bank initiating coverage on the stock this week. Both brokers are positive, commencing coverage with Buy ratings.
UBS points out Collins Foods has historically delivered resilient growth, as same store sales growth for KFC has been 5.9% and for Sizzler 6.3% from FY02 to FY11. Refurbishment of stores should see solid growth continue, Deutsche noting 84 of the KFC stores are expected to be refurbished over the next five years. This compares to 19 refurbishments over the past three years.
New store openings should also deliver some growth. According to Deutsche Bank, the franchise agreement under which Collins Foods operates will allow for new store openings of up to seven new stores annually over the next five years.
UBS agrees, noting management expects to open 25 KFC and nine Sizzler restaurants over the medium-term. This would equate to 24% restaurant growth from current levels, a positive as since 2005 new KFC restaurants have generated average pre-tax return on invested capital (ROIC) of 38%. Refurbishments have generated an average ROIC of 24%.
Deutsche expects this will underpin three to five year capitalised annual growth in earnings per share (EPS) growth of around 10%. Forecasts reflect this, Deutsche expecting EPS for Collins Foods of 27c in FY12 and 30c in FY13.
By way of comparison, UBS is forecasting EPS of 27c and 29c respectively and expects capitalised annual EPS growth of 8% for FY12-FY14.
Collins Foods should be able to fund this growth, as UBS notes the balance sheet is in solid shape. Fixed charge cover stands at 2.6 times and debt/EBITA (earnings before interest, tax and amortisation) is at 2.1 times.
The strong balance sheet should also support dividend payouts, UBS expecting Collins Food will have a payout ratio of better than 50%. This implies a FY12 dividend yield of more than 6% on UBS's numbers, fully franked.
On a sum-of-the-parts basis UBS values Collins Foods in a range of $2.77-$3.26. Price target has been set at $3.00, roughly in the middle of this range. Deutsche similarly has a target of $3.00 per share, which is based on the broker's discounted cash flow valuation.
At current levels, Deutsche suggests the valuation of Collins Food is compelling, as earnings forecasts suggest a FY12 earnings multiple of 7.4 times. This is well below the listed ex-100 retailers average of 11.2 times and suggests good relative value in Deutsche's view, especially given the current uncertain economic environment.
The major risk to the story according to Deutsche is delays to roll-outs and refurbishments, while there is also the risk of the franchise agreement with Yum! being terminated. This is viewed as unlikely but cannot be completely discounted.
A strong and experienced management team helps reduce risks to the Collins Foods story, as UBS notes CEO Kevin Perkins has been with the company for 32 years and the top five executives have an average of 26 years service.
Since listing Collins Foods shares have traded in a range of $1.92 to $2.48. As at 10.40am today the stock was 2c higher at $2.05, which suggests significant upside relative to broker price targets.
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