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Highlights

  • Analyst optimism points to a medium-term recovery for Collins Foods, despite recent struggles.

  • UBS sets a price target of AU$9.80, suggesting a potential 12% upside for the stock in the next 12 months.

  • The company's continued digital sales growth and cost deflation could boost margins in FY25 and beyond.

Collins Foods Ltd (ASX:CKF), the Australian operator behind the KFC brand and a growing Taco Bell network, has faced a challenging few years. Rising operational costs and the impacts of the high cost of living on consumer demand have taken a toll on the company’s short-term performance. However, with its current stock valuation and the prospect of a medium-term recovery, the company could present an appealing opportunity for contrarian investors looking for value in a market that's grown lukewarm on the stock's near-term growth.

Recent Struggles, Yet Potential for Recovery

Collins Foods, a major KFC franchisee in both Australia and Europe, has struggled recently due to several macroeconomic factors. Inflationary pressures have significantly raised its costs, while consumers' purchasing power has been impacted by rising living expenses. Despite these headwinds, analysts are starting to believe that the company is well-positioned to recover over the next few years. The business may not return to its former profit margins, but brokers are hopeful for substantial profit growth in the medium term, driven by various factors, including digital sales growth and potential cost relief in key areas.

Analysts Optimistic About Future Growth

According to a consensus of analysts compiled by Commsec, Collins Foods is still viewed favorably by the market. Notably, UBS has set a price target of $9.80 for the stock, implying a potential 12% upside over the next 12 months. This optimistic outlook comes as the company is expected to cycle against easier sales comparisons in the latter half of FY25. UBS suggests that as the company overcomes challenging cost pressures, its profit margins could improve, and its sales growth could accelerate. Additionally, they anticipate that Collins Foods will continue to prioritize profitable value offerings, which helped the company exceed its EBITDA margin guidance in the first half of FY25.

UBS also sees cost deflation in KFC Australia's supply chain as a potential tailwind for the company. As food prices decrease, Collins Foods could experience less pressure from rising costs, further boosting its earnings. The broker expects this trend to continue into FY26, driven by the rolling nature of the company's contracts.

Digital Sales Driving Margins

One of the most encouraging signs for Collins Foods is the growth of its digital sales channels in Australia. In the first half of FY25, digital sales accounted for 35% of the company’s total sales, up from 28% in the same period the previous year. This shift towards digital is helping to lift average order values and improve the product mix, resulting in higher profit margins.

Valuation and Future Profit Growth

From a valuation perspective, Collins Foods’ share price is currently trading at a relatively modest multiple of 16x its estimated earnings for FY26. Analysts project significant earnings growth, with earnings per share (EPS) expected to increase by 43% in FY26, followed by 22% in FY27 and 17% in FY28. In addition, Collins Foods offers a projected grossed-up dividend yield of 4.75%, including franking credits, making it an attractive option for income-focused investors.