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Collins Foods: Fast Food Resilience & Taco Bell Turnaround

Australia | Nov 29 2023


A strong first half is seen as a reliable strong FY24 indicator for Collins Foods, with the first half including a turnaround for Taco Bell stores.

-First half results for Collins Foods outperform consensus expectations
-Strong same store sales growth for all brands and regions
-Europe outperforms, while Taco Bell lifts in Australia
-Some brokers prefer Domino’s Pizza in the QSR space


By Mark Woodruff

First half earnings and underlying profit for Collins Foods ((CFK)) came in ahead of consensus forecasts by 6% and 37%, respectively, after all divisions reported margin expansion. Shares jumped by 9% in reaction to the results, closing yesterday at $11.01, up from around $7.00 at the start of 2023.

The company, which operates Quick Service Restaurants (QSR) in Australia, the Netherlands and Germany, continues to execute well, in Jarden’s opinion. Products are leading on value compared to alternatives and winning market share from incumbents, observes the broker. 

In the Netherlands, the company is a corporate franchise partner, running KFC on behalf of US-listed fast-food company Yum! Brands.

Overall, Add-rated Morgans suggests first half results reflect a resilient demand environment, effective margin management and strong cash generation. Morgans anticipates the business is well placed to deliver for the remainder of FY24.

Macquarie believes sales have turned around for the Taco Bell stores in Australia, with revenue growing by 19% to $25m. The stores may have benefited from an Uber Eats rollout, suggests Citi, as well as improved product quality, innovation, and "value". Management will be reviewing its development pause for these stores in the second half.

Citi attributes the earnings and underlying profit beats against consensus to a strong earnings performance by Europe (boosted by 16% store count growth), slightly better than expected margins, and a lower net interest expense.

The Europe segment (which accounts for around 15% of group earnings) is performing strongly, agrees Ord Minnett, despite cost pressures and headwinds for consumer spending.

Earnings (EBIT) from continuing operations in the first half for the Collins Foods group rose to $60m from $31.2m in the previous corresponding period, with underlying profit up by 28.7% to $31.2m.

Same store sales (SSS) growth was strong in all brands and regions, notes Macquarie, rising for KFC Australia, KFC Europe and Taco Bell by 6.6%, 8.8%, and 7.9%, respectively.

The KFC Australia e-commerce channel jumped by 25% on the previous corresponding period, while over 50% of sales in the Netherlands also run via e-commerce.

Whilst the input cost environment is clearly volatile, Morgans believes Collins Foods is well placed to mitigate these pressures and retain value for customers. The company expects challenging cost of living pressures will continue for consumers in the second half and anticipates margins will be broadly neutral in FY24, relative to FY23.

Macquarie suggests slower growth so far for KFC Australia in the second half is probably due to the impact from the above mentioned rising cost of living pressures. Management advised SSS growth across the first six weeks of the second half was positive across all divisions, with KFC Australia, KFC Germany, KFC Netherlands and Taco Bell up by 2.9%, 8.6%, 8.1% and 8.7%, respectively.

Almost all QSR players (ex pizza) in Australia have put through multiple pricing increases, which will assist earnings margins, notes UBS, and potentially suggests conservatism around flat earnings (EBITDA) guidance by management for FY24.

Over in Europe, pricing increases over August and September should help offset minimum wage increases in the Netherlands, suggests the analyst.

Despite the challenging macroeconomic backdrop, UBS feels Collins Foods is well positioned and has multiple levers to drive ongoing earnings growth.

More outlook commentary 

Morgans highlights Colins Foods offers exposure to the resilience of consumer demand for KFC in Australia with promising long-term growth opportunities in Europe, while the analyst treats Taco Bell as a (largely) free option.

At current multiples, this broker believes the company is attractively valued for the organic and inorganic growth prospects on offer. In the event of a severe downturn in consumer spending, Morgans suggests KFC would likely benefit from consumers trading down.

Citi expects the turnaround in Taco Bell will be well received by investors, and potential Europe acquisitions could be a positive catalyst for the share price.

While Jarden retains a preference for Domino’s Pizza Enterprises ((DMP)) in the QSR space, metrics for Collins Foods are starting to look increasingly more attractive by comparison, due to a lack of balance sheet risk and recent poor execution by Domino’s.

Macquarie also sees more medium-term upside at Domino’s, provided management can return franchisee level profitability back to acceptable levels.

Analysts at Canaccord Genuity consider the strong interim performance by the company as yet more evidence of the thesis that says fast food is resilient when tougher economic times arrive. They have lifted their price target to $10.95 from $8.80, while retaining a Hold rating.

There are five brokers monitored daily by FNArena which cover Collins Foods, generating two Buy (or equivalent) ratings and three Holds.

The average target price of the five brokers rises to $11.99, up from $10.99, which suggests around 9.5% upside to the latest share price.

Jarden, Wilsons and Canaccord Genuity are not covered daily. Jarden raises its target to $10 from $9.20. Wilsons has an Overweight rating in combination with a $11.19 price target.

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