AmWatch - Berjaya Food : Acquires the remaining 50% stake in Starbucks Coffee Sdn Bhd BUY

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Berjaya Food : Acquires the remaining 50% stake in Starbucks Coffee Sdn Bhd    BUY

We reaffirm our BUY call on Berjaya Food (BFood) with a higher fair value of RM2.50/share (vs. RM2.00/share previously), pegged to a PE multiple of 22x fully-diluted CY15F earnings. This follows the earnings upgrade from the proposed acquisition of the remaining 50% equity interest in Starbucks Coffee Sdn Bhd  (BStarbucks) from Starbucks Coffee International, Inc. Post acquisition, Starbucks’ franchise right will be extended till 2039 from 2024 currently.

The acquisition is for a purchase consideration of USD88mil or RM279.5mil, representing a PE multiple of 16x based on the latter’s April 2014 profit after tax of RM35mil. The acquisition is value accretive, given BFood’s current fully diluted PE of 19x and that Starbucks Corporation US is trading at an estimated consensus PE of 30x. Note that in July 2012, BFood acquired a 50% equity interest in BStarbucks for RM71.8mil based on a PE of 14x.

The acquisition further strengthens BFood’s position as an F&B player given Starbucks strong global franchise value; it also helps the former to capitalise on Starbucks’ exponential growth (173 outlets).  More importantly, the full control of BStarbucks enables BFood to further explore potential business opportunities such as fast-moving consumer goods and distribution rights in Starbucks.

Starbucks will be the key revenue driver from FY15F onwards given the enlarged earnings and strong double-digit SSSG. Its target expansion of 25 outlets p.a. is achievable. The acquisition is expected to be completed by Sept 2014. Following our earnings upgrades, Starbucks will now command 54% of revenue followed by Kenny Rogers Roaster Malaysia’s 27%. We now expect FY15F earnings to rise to RM32mil (+39%) from RM23mil in FY14 and further expand to RM53mil (+66%) in FY16F to reflect 100% consolidation of Starbucks. The acquisition will be funded through borrowings. Post-acquisition, gearing remains healthy at 0.7x. We project higher dividends of 5.3sen and 6.3sen in FY15F and FY16F, respectively.

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