BFood on expansion spree

I really like this counter, looking for the right time to buy in. Injection 50% of Berjaya Starbuck asset under Berjaya Foods definitely will offer a better growth opportunity rather than just relying on KRR. Its a good brand but i dont really feel like KRR has a ummph factor to drive customer to their restaurant frequently like KFC or McD.

Now, with Starbucks under BJFood umbrella, will give us opportunity to participate Starbucks' growth potential. Clean balance sheet, good business model and future growth through restaurant expansion and potential of enjection of other Berjaya asset such as Krispy Kreme and Wendy's

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KUALA LUMPUR: Berjaya Food Bhd (BFood) is showing promising growth prospects with the injection of Berjaya Starbucks Coffee Co Sdn Bhd into its business and the plan to expand its chain of Kenny Rogers Roasters (KRR) restaurants in Malaysia and Indonesia.

BGroup, which holds the global KRR franchise via wholly-owned Roasters Asia Pacific (HK) Ltd, is venturing into China.

BFood, on the other hand, is principally involved in the development and operations of KRR in Malaysia through wholly-owned Berjaya Roasters (M) Sdn Bhd, the franchise holder of KRR restaurants in Malaysia.

Listed on Bursa Malaysia in March, BFood’s FY11 net profit was up by 17% to RM10.2 million from RM8.68 million in FY10. Revenue grew by 19% to RM71.9 million from RM60.42 in FY10.

In a recent interview with The Edge Financial Daily, BFood CEO Datuk Francis Lee expected the company’s revenue and net profit for FY12 ending April 30 to grow at the same pace as in the previous year.

BFood’s earnings for FY13 onwards will get a boost from the ongoing acquisition of Berjaya Starbucks, which will be concluded in the first quarter of 2012, said Lee, a former director of Berjaya Starbucks.

Last month, BFood proposed to buy a 50% stake in Berjaya Starbucks from BGroup for RM71.69 million cash or at a price-to-earnings ratio (PER) of 13.5 times.

The acquisition will be financed by a proposed cash call to raise over RM70 million. The proposed rights issue is on the basis of four rights shares together with four free warrants for every five existing shares held at an issue price of 65 sen per share.

Kenny Rogers Roasters at Aeon Bandaraya Melaka shopping centre.

Berjaya Starbucks, for its FY11 ended April 30, recorded a net profit and revenue of RM10.62 million and RM145 million respectively.

When asked if the acquisition of Berjaya Starbucks at a PER of 13.5 is expensive, Lee’s response was: “At 13.5 times, I think it’s a fair value because of the visibility of Starbucks in the whole of Malaysia. It will propel BFood to a different level.”

“If you look at Starbucks Corporation (listed on Nasdaq) itself, it has a PER of 26 times,” he added.

However, Lee declined to give details of Berjaya Starbucks’s expected future earnings. He only revealed that Berjaya Starbucks same-store sales growth has been about 15%.

According to Lee, BFood is targeting to open 12 to 15 Starbucks outlets every year.

“With 120 outlets currently, Berjaya Starbucks’ store growth would be about 12%,” he said, adding that BFood plans to have 200 outlets over the next five years.

Lee said a master development agreement with Starbucks Corporation was in the process of being re-signed and should be concluded within two months.

The new agreement will allow Berjaya Starbucks to run its franchises for 20 years compared with 10 years previously.

Going forward, Lee said Starbucks would always be the preferred brand in Malaysia.

“Starbucks will be the first port of call when it comes to any mall or premises that is ready to be occupied because of its unique position and strength, US backing, product development and marketing tools,” he said.

On BFood’s expansion into Indonesia, Lee said in about two weeks, it would complete a deal allowing BFood to develop and operate the KRR franchise in Indonesia.

In late July, BFood entered into a joint venture with PT Mitra Samaya, PT Harapan Swasti Sentosa and PT Boga Lestari Sentosa to develop and operate the KRR franchise in Indonesia under PT Boga.

Under the deal, BFood will pay RM1.91 million for a 51% equity stake in PT Boga. On top of that, BFood will extend a RM6.09 million loan to the Indonesia-based company and will subscribe to the rights issue of PT Boga that will cost about RM1.99 million. BFood is granted an option to raise its shareholding to 70% within seven years.

PT Boga has four KRR restaurants in major shopping malls in Jakarta.

In addition to the four restaurants in Indonesia, Lee said PT Boga will open another five by the end of this year, and another three more by end-June 2012. In total, there will be 12 stores by end-June 2012.

Lee expects the KRR restaurants in Indonesia to break even by April 2012 and contribute to BFood’s earnings in FY13.

“The following financial year-end should have some positive growth in terms of bottom-line numbers,” he said.

Lee emphasised the potential of BFood’s business in Jakarta, the most populous city in Southeast Asia, with a population of over 20 million.

After opening 20 to 25 KRR restaurants in Jakarta, BFood will also look at other places in Indonesia, Lee said.

Within the next five years, he expects a total of 60 to 70 KRR restaurants to be in Indonesia.

Lee said Indonesia will be the company’s focus for the moment but other potential countries will include India, Taiwan, Vietnam and Thailand.

In Malaysia, there are currently 68 KRR restaurants — 55 BFood-owned and 13 franchised restaurants. BFood plans to open another 15 KRR restaurants in FY12, Lee said.

While BFood’s focus will be mostly in Southeast Asia for the moment, BCorp will be the vehicle for the KRR franchise venture in China.

In April, Lee had set up a team in Shenzhen, China, and said BCorp would open its first KRR restaurant there in the first week of November.

The restaurant will be located in Shenzhen Link City Underground Shopping Mall in Futian district. The unique underground mall is linked to an underground mass rapid transit, he said.

“It’s on the border of Kowloon and China, so there is a lot of traffic and people passing through,” he said.

Lee said BCorp has set up five stores in China and is under negotiation to open another 20.

BFood may inject other food and beverage (F&B) brands held under BGroup such as Papa John’s Pizza, Wendy’s Restaurants and Krispy Kreme Doughnuts.

“When the other franchises [under BGroup] are ready [in terms of earnings] there may be a possibility of injecting them into BFood,” he said.

“The idea is to hold BFood as the preferred route to hold all of our group’s F&B businesses,” he added.

Lee said BFood will look to buy other F&B businesses at low PERs to add value to the company. “BFood’s growth can be organic and also through external acquisitions,” he said.

To ensure a high success rate for its KRR operations, Lee said BCorp consults focus groups.

Based on the focus groups’ findings, Lee said they will tweak the KRR menu to better suit the food taste of different countries. For instance, people in China prefer a slightly sweeter sauce, whereas in Indonesia, a slightly saltier or spicier sauce is preferred.

However, KRR restaurants worldwide will maintain their signature products and sauces, he said.

KRR has redesigned its restaurants to create a modern and contemporary ambience, Lee said.

The KRR logo has been changed, too. The face of Kenny Rogers, country musician and co-founder of KRR, has been replaced with a flame and the new overall logo has more aggressive colours, Lee said.

“The younger generation does not know who Kenny Rogers is,” he explained.

Lee said BFood has streamlined the KRR menu to increased gross profit margins. He added that the average spending in Malaysian KRR restaurants is about RM45.

KRR’s competitors are table service restaurants in the mid-casual segment such as Pizza Hut, which has a similar ambience to KRR restaurants, he said. He clarified that KRR is not a fast food business.

To ensure KRR’s quality is maintained while the business is expanding, Lee said an important criteria is to keep recruiting and training employees.

Not known to many, Lee said KRR and Berjaya Starbucks have a mobile restaurant capable of serving up to 200 guests.

“If you can have the Starbucks and KRR van together at an event, it will be a unique experience,” said Lee, who holds such an event at his home once a year.

Financially, BFood has a sound balance sheet with cash reserves of RM31.29 million with no borrowings as at end-July.

Lee said the cash reserves will be used to open more stores and pay dividends.

BFood paid its first interim dividend of three sen in FY11 amounting to RM4.26 million, which translates into a payout ratio of 41.8%.

Based on its closing price last Friday at 84 sen, BFood has a dividend yield of 3.6%.

Since its maiden trading day on March 8, BFood’s share price has climbed 65% to 84 sen from its issue price of 51 sen.

According to Bloomberg data, BFood has a PER of 11.65 and market capitalisation of RM119 million. As a comparison, KFC Holdings (M) Bhd has a PER of 16.43 and market capitalisation of RM2.62 billion, while QSR Brands Bhd has a PER of 13.36 and market capitalisation of RM1.62 billion.

The other F&B stock listed this year, Oldtown Bhd, has a PER of 7.74 and market capitalisation of RM303.6 million.

Lee said BFood’s market capitalisation of RM119 million gives it much potential to grow compared with KFCH and QSR.