Australia | Jun 28 2023
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Brokers raise target prices for Collins Foods following FY23 results on stronger same store sales growth and higher margins for KFC Europe.
-FY23 results for Collins Foods outperform broker expectations
-Margins for KFC Europe impress while Australia KFC lags
-Wilsons notes robust same store sales for early-FY24
-How the company compares to peers
By Mark Woodruff
Shares in Collins Foods ((CFK)), the operator of Quick Service Restaurants (QSR) in Australia, the Netherlands and Germany, shot up nearly 18% yesterday after releasing FY23 results (April year-end) ahead of broker forecasts.
In the Netherlands, the company is a corporate franchise partner, running KFC on behalf of US-listed fast-food company Yum! Brands. There are 48 KFC stores in the Netherlands and 16 in Germany, along with 272 KFC franchises in Australia.
Australia also counts 28 Taco Bell restaurants, though the carrying value of these assets has now been fully impaired after a -$36.7m write-down dragged on FY23 profit, and the rollout of new restaurants remains on hold. Nonetheless, management is convinced this brand will ultimately be successful in Australia as a value-focused, youth-oriented offering.
An agreement has been struck to sell Sizzler Asia for $22.8m, which Canaccord Genuity considers a good outcome.
Stronger FY23 same store sales (SSS) growth and a higher KFC Europe margin exceeded Wilsons forecasts, while a weaker KFC Australia margin and higher corporate costs provided an offset.
The highlight for Canaccord Genuity was KFC Europe SSS growth for the Netherlands and Germany of 12.8% and 17.3%, respectively.
While management didn’t offer explicit guidance, Wilsons notes robust SSS across the first seven weeks of FY24 showing growth in Australia, Netherlands and Germany of 8.8%, 9% and 12.4%, respectively.
Higher ticket prices drove the stronger SSS growth, observes Morgans, though strong transaction growth in Europe and delivery were also strong contributing factors.
Group earnings of $205m were at the upper end of the consensus forecast, while management guided to a more resilient margin performance in FY24 than Morgans previously anticipated, suggesting commodity input prices may have peaked.
Wilsons is encouraged by the margin outlook, given management guided to a "broadly neutral" EBITDA margin for KFC Australia in FY24, recovering to historical norms in FY25. For KFC Europe, there was also a positive change in margin guidance to "limited margin contraction" from a "-2-3 ppt decline".
While persistent cost inflation is delaying a cyclical recovery in margins and constraining near term earnings growth, the broker admires the resilience of SSS in recent months in an environment of tightening consumer spending.
Both inflation and supply chain disruption are impeding what are normally attractive and predictable margins, though Wilsons considers this a timing issue and expects a cyclical recovery, complemented by structural growth in KFC Europe derived from operational scale.
Canaccord Genuity is less sanguine and retains its Hold rating on Collins Foods. It’s felt evidence of transaction growth at KFC Australia is necessary to drive any margin recovery.
Macquarie notes benefits will not flow through the profit and loss statement in the near term, as most of the company’s contracts are written on a fixed-price basis.
Canaccord considers current transaction growth is challenged due to management’s firm view on offering consumers ‘value’ despite ongoing cost pressures, resulting in lagged price increases.
UBS highlights a 1% improvement in volumes across the whole company results in a 10% lift for EPS.
This broker suggests KFC's strong value offering positions it well to benefit from consumers trading down, and highlights management has not ruled out further pricing increases.
The final dividend was 15cps, higher than Morgans forecast of 12cps, taking the full year payout to 27cps.
A comparison to QSR peers
According to Canaccord Genuity, Collins Foods' price and marketing strategies have been executed adeptly.
Jarden agrees and points out the company is leading on value and winning share from incumbents across core KFC banners. This broker is becoming more positive due to not only execution but also valuation and relative performance to local peer Domino’s Pizza Enterprises ((DMP)).
It would appear KFC is gaining Australian share from Domino’s primarily, and to a lesser extent McDonalds, note Jarden analysts.
Nonetheless, Jarden retains its preference for Domino’s, due to a larger global growth runway, full region exclusivity and margin upside.
Confirmation of an acceleration in new store openings for KFC Europe will present an important catalyst to build further confidence in the long-term growth profile of Collins Foods, suggests Wilsons.
While the cost environment is clearly volatile, Morgans feels the company is well placed to mitigate cost pressures and retain value for customers, and believes shares are attractively valued when organic and inorganic growth prospects are also considered.
On the flipside, UBS feels the risk/reward balance is currently even, pending more comfort of increased pricing and volumes, echoing Canaccord Genuity’s stance in awaiting transaction growth for KFC Australia.
FNArena's daily monitoring consists of Morgans (Buy or equivalent) and Neutral-rated UBS and Macquarie which actively cover Collins Foods. The average target price has risen to $9.95 from $8.80 in reaction to the results, suggesting just over 3% upside to the latest share price.
Jarden, Canaccord Genuity and Wilsons are not monitored daily. These brokers have an average target of $9.83 with two Hold (or equivalent) recommendations by Jarden and Canaccord, while Wilsons has an Overweight rating.
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