Should you buy Collins Food ?

Stock Of the Day  - Collins Food  (Expensive)

Collins Foods Limited (CKF) is an Australian company in the restaurant which owns and operates 170 KFC and 26 Sizzler restaurants in Australia as well as 60 franchised Sizzler restaurants in Asia. The company also has a 50% stake in Snag Stand. For the half-year to 12 October 2014, the company saw revenues grow by almost 30% year on year at 29.6% to $ 256.7 million. Unfortunately, this topline growth did not translate to the bottom line because it was forced to take impairment charges amounting to $ 36.5 million because of the ongoing problems with its Sizzler business which is struggling and the net result was a loss of $ 22.6 million for this period.
 

CKF Financial Highlights (Source - Company Reports)

Nevertheless, there are some positive takeaways from the results announcement. Same-store sales were up by 3% at KFC Queensland while sales grew by 4.3% at KFC Western Australia/Northern Territory which was recently acquired. Three new KFC stores were opened during this period while 13 others were remodelled and refurbished. The interim dividend declared was 5 cents per share which represented a year-on-year increase of 11%. CEO Graham Maxwell noted that the company was particularly pleased with the performance of the KFC business in these territories. Plans to rejuvenate the struggling Sizzler business have been implemented and initiatives such as the rebranding to Get Refreshed are showing signs of promise. Three stores Cleveland, Caboolture and Mermaid Beach have been remodelled and the results have been encouraging with solid signs of increases in sales and revenues.


Investment for future growth (Source - Company Reports)

The write-downs on the Sizzler business, though unsatisfactory, will have no impact on the Asian venture of the company and, being in the nature of non-cash charges, will not have a negative impact on payment covenants or the payment of future dividends. For the remainder of 2015, the company intends to continue expanding the number of KFC stores while continuing to invest resources in the improvement of its newly acquired businesses and to step up investment in Snag Stand and Sizzler Asia. 


KFC Marketing Campaigns (Source - Company Reports)

Apart from the loss for the half-year, other financial indicators all show positive growth trends. In addition to the growth in revenues, NPAT at $ 10.7 million is up 43% and EBITDA is up 37.6% to $ 29.4 million. Net cash flow from operations was down by $ 3.8 million but this was not due to operational factors but the timing of tax payments relating to the previous year.


KFC QLD Highlights (Source - Company Reports)

KFC Queensland has reported Same-Store Revenue Growth of 3% with overall growth of 6.8%. EBITDA margins are by 280 basis points to 17% while EBIT grew by more than 33%. KFC Western Australia/Northern Territory reported Same-Store Revenue Growth of 4.3% and overall revenue growth of 3.7%. EBITDA margin was reported at 10.1%. Total capital expenditure for the period was $ 13.3 million with $ 9.7 million for Queensland and $ 3.6 million for Western Australia/Northern Territory.


Topline Challenges at Sizzler (Source - Company Reports)

Sizzler chain is continuing to experience topline problems with revenues declining by 9.8% including Same-Store Revenue Decline of 8.4%. Margins continue to be under pressure resulting in the non-cash impairment charge of $ 2.5 million on restaurants, $ 27.1 million on goodwill and $ 6.3 million on the brand. However, the new Get Refreshed initiative is starting to arrest the rate of revenue decline after its completion at the end of November 2014 and customers are obviously responding to the remodelled restaurants. A strategic review will be carried out after the summer.Sizzler Asia (which operates in China, Japan and Thailand) continues to report satisfactory performance and royalty revenue for the first half grew by 8.4%.


CKF Daily Chart (Source - Thomson Reuters)

Despite the decline in net cash flows because of the delay effect of the IPO cost, operating cash flows before interest and tax were up $ 4 million to $ 28.2 million. The debt position continues to be comfortable with net debt at the end of the period at $ 131.7 million and a leverage ratio of 2.14 and the overall debt facilities stand at $ 175 million.

The company has spelt out its priorities for the rest of the fiscal 2015 and clearly the top priority must be to restore Sizzle Australia to positive and profitable growth through the continued implementation of the Get Refreshed initiative and the strategic review of the post-summer campaign. The other priorities concern the KFC business and include continued growth of the business, improve the operational performance in Western Australia/Northern Territory and build two more stores over and above the four built in the first half. Finally, Snag Stand needs a comprehensive concept and continued investment to build up the brand. As long as Sizzler continues to drag down the profitable growth of the company, we believe that despite this downward correction and the dividend yield of 4.8%, the stock is still expensive at the current level.