Collins Foods A Winner With New KFC Franchisee

This story features COLLINS FOODS LIMITED. For more info SHARE ANALYSIS: CKF

-Increased growth opportunity
-Sizzler struggling
 

By Eva Brocklehurst

Brisbane-based Collins Foods ((CKF)) has made a major acquisition from both an earnings and strategic perspective. Moelis believes this is a game changer for Collins, as the acquisition adds to a very sustainable platform for growth.

Moelis observes the share price has risen 25% after the announcement of the acquisition of Competitive Foods. Nevertheless, the broker considers the yield is undemanding and there's further upside to come from this growth potential. Collins Foods is expected to reveal an underlying profit of $17.3m in FY14 – the company has an April 30 year end – against the $16.4m recorded in FY13. Like-for-like sales grew 1.7% for KFC in the third quarter, on the back of 127 stores. Poultry contracts for the next 12 months have been negotiated at consistent prices, which the broker considers is a satisfactory result. Moelis estimates a 10c dividend for FY14. Moelis has a Buy rating on Collins and a $2.40 target.

Deutsche Bank also observed after the quarterly update that sales were improving at KFC but were weak at Sizzler. On the positive side, margins had improved at both chains. The broker believes the stock has attractive multiples and retains a Buy rating and $2.20 target. UBS is also on the Buy side with a $2.00 target, noting some improvement in the latter stages of the first half as efficiency initiatives paid off. On  the FNArena database the dividend yield on FY14 estimates is 5.3%, and on FY15 it's 5.8%.

The acquisition of Competitive Foods for $55.6 million was completed this month. This is the franchisee of 44 KFC stores, 40 in Western Australia and four in Northern Territory. The acquisition is expected to generate revenue of $110m and earnings of $10-10.3m in FY14. What is crucial to Collins is a retail footprint in a new region, with store roll-out opportunities, while being more than 15% accretive in the first full year. Management is targeting a 200 basis point margin improvement over the initial three years, supported by a $25m capex program to reinvigorate the stores. Moelis estimates Collins' earnings will rise from an estimated $53.8m in FY14 to a forecast $63m in FY15.

Any negatives? The company has confirmed that its Sizzler stores are struggling within a subdued and competitive casual dining segment and like-for-like sales are likely to be lower in FY14. These were down 9.6% over the summer, consistent with the 9.4% fall in the first half. The company is confident of the long-term prospects for Sizzler but Moelis notes the contribution of that chain to earnings is now well below the 10% level after the acquisition of Competitive. Hence, the chain is becoming less relevant.

Collins Foods operates 122 KFC outlets in Queensland alone. The company also operates 27 Sizzler restaurants in Australia. 
 

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