Collins Foods’ New European Mix

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A strategic review by management at Collins Foods alters KFC expansion plans in Europe and aims to exit Taco Bell operations.

-New strategic direction for Collins Foods
-Swing to German KFC expansion away from the Netherlands
-Upcoming exit from Taco Bell under negotiation
-Wilsons feels the Collins Foods share price is excessively discounted

By Mark Woodruff 

Management at quick-service restaurant operator Collins Foods ((CKF)) will effectively reallocate future growth capital in Europe away from the Netherlands by planning to accelerate KFC expansion in Germany, targeting between 40 and 70 new restaurant openings over the next five years.

In the Netherlands, headwinds have arisen from cost-of-living pressures, labour inflation, and development constraints, impacting profitability of the portfolio, explains broker Wilson, and for the short-term, new restaurant openings in the country will broadly offset closures.

As part of its recent Strategic Review, management also announced an upcoming exit from the loss-making Mexican food chain Taco Bell, which Jarden believes will deliver an immediate earnings uplift from FY27, alongside potential upside from the redeployment of associated corporate costs.

Under the new strategy, the roll out run-rate in Australia is likely to continue under the current development agreement between Collins Foods and Yum! Brands.

According to Goldman Sachs, the faster German expansion is a positive given the company’s existing footprint and regional familiarity, as well having exclusivity and backing from Yum! It’s also noted Germany has a large, under-penetrated market with a relatively favourable development environment.

Wilsons agrees the switch to Germany makes sense given a stronger operational performance by Collins Foods in that country relative to the Netherlands.

Apart from the strategic update, management offered few insights into current trading conditions other than to note a year-on-year improvement for consumer sentiment in Australia and Germany.

Collins Foods operates quick service restaurants (QSRs) in Germany, the Netherlands and Australia.

The company is the largest KFC franchisee in Australia, which remains its most profitable and strategically important market, with Wilsons highlighting margin recovery in KFC Australia is expected to be the primary earnings growth driver for the group in FY26.

Positively, management is now placing greater emphasis on sales growth and profitability within the existing store network in Australia, notes the broker, shifting focus away from aggressive new store openings and the associated cannibalisation risks.

Taco Bell

Discussions with Taco Bell International regarding a potential transition to new ownership remain ongoing.

UBS views an exit from the Taco Bell business as a prudent reallocation of capital, given the brand’s underperformance to date, while Goldman Sachs believes the venture has demanded disproportionate management attention.

Wilsons is disappointed by the exit, given its positive view of the Mexican-inspired QSR opportunity, but this broker estimates pro forma EPS accretion of around 6%, noting the specifics of the divestment process are yet to be finalised.

Wilsons also highlights the potential to streamline costs in the Shared Services/Other segment, given the support currently allocated by Collins Foods to Taco Bell.

The German expansion

Yum! Brands has granted Collins Foods a period of exclusivity to open and operate KFC restaurants in select trade areas within North Rhine Westphalia and Baden-Wrttemberg, where the company already has an established presence.

Wilsons notes Germany is expected to become Collins Foods’ second strategic growth pillar, with potential acquisition opportunities under consideration to accelerate scale.

The Netherlands

An operational realignment will occur in the Netherlands with a focus on lifting the same store sales (SSS) performance and driving cost efficiencies, explains UBS, along with reviewing and optimising the existing restaurant portfolio.

A partial impairment of the Dutch restaurant portfolio is expected in FY25, with the non-cash impact estimated to be between -$25.5-32.7m based on the early impairment work completed to date.

This impairment suggests to UBS there is a risk operations have not materially improved since interim results.

Goldman Sachs lowers its store roll-out profile for KFC Netherlands to reflect ongoing challenges in the consumer and regulatory environment to four stores per year, down from six.

Outlook

The Collins Foods share price remains excessively discounted, in Wilsons’ view, trading on an FY26 PE ratio of 13 times (pre-AASB16).

While Jarden believes the medium-term outlook for the company remains favourable, with a strong balance sheet, clean network, and accelerated German store roll out, near-term revenue headwinds are likely given the tough consumer backdrop and high competition.

For the near-term, Jarden expects Collins Foods will continue to face revenue headwinds and margin contraction near term, but any evidence of rising revenue, probably in FY26, should be a driver of material EPS growth and a multiple re-rate.

Jarden analysts believe the acceleration of store openings in Germany will be value accretive and retain an Accumulate rating, one level below Buy in the broker’s grading system.

At this stage, only UBS from among six daily monitored brokers in the FNArena database covering Collins Foods has updated research following the Strategic Review.

The average target price of the six (four Buys; two Holds) remains at $9.75, suggesting around 22% upside to the share price at the time of writing.

Outside of daily monitoring, Goldman Sachs is a Buy, Wilsons and Jarden are Overweight, and Canaccord Genuity with updated research pending is on Hold. The average target of these four is $9.09.

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