Company Overview: Collins Foods Limited is engaged in the operation, management and administration of restaurants. The Company operates in three segments: KFC Restaurants, Sizzler Restaurants and Shared Services. The Company's restaurants comprise approximately three restaurant brands, including KFC Restaurants, Sizzler Restaurants and Snag Stand joint venture outlets. The Company operates approximately 180 KFC restaurants in Queensland, northern New South Wales, Western Australia and Northern Territory. It owns and operates over 20 Sizzler restaurants in Australia. Snag Stand operates approximately five corporate-owned outlets and a franchised outlet. The KFC brand is owned by Yum!. The Company operates in Australia and Asia.


CKF Details

Collins Foods Limited’s (ASX: CKF) multi-pronged geographic store expansion strategy seems to be tracking well with investments helping expand the group’s footprint and facilitating an accretive rollout strategy across the globe for a consistent earnings growth. Implementation of its own delivery network in Australia with Taco Bell rollout and network expansion in Europe/Australia seem to provide growth levers.

Ongoing KFC acquisitions: Collins Foods’ subsidiary, Collins Restaurants South completed 14 KFC restaurants’ acquisitions in Tasmania from a subsidiary of Yum! Brands Inc. After this, the group needs to acquire four more restaurants as per their plan announced in June 2017. Their Western Australia acquisition and three restaurants in South Australia have been forecasted to finish shortly. As of the first half of 2018, KFC Australian segment’s revenue rose 8.5% year on year (yoy) to $270.8 million wherein $8.3 million or 3.3% was contributed by 13 store-acquisition in NSW/Vic border completed in July 2017. The segment’s total Same Store Sales (SSS) rose only 1.2% impacted by negative comps in WA.  EBITDA rose 7.6% yoy to $45.5 million but EBITDA margin fell 0.1% to 16.8%. The group finished 5 out of 28 restaurants’ acquisitions from Yum! as on October 2017.
 

Australian Stores as of first half of 2018 (Source: Company reports)
 
Better than expected Netherlands performance: The group had a total of 31 KFC restaurants throughout Europe as of the first half of 2018 with 15 KFC restaurants from Germany and 16 KFC restaurants in Netherlands. The Proforma based performance on Collins Foods owing to all acquired restaurants during the half year helped in reporting a total revenue of $50.3 million and an EBITDA margin of 9.6%. The region reported an SSS growth of 1.8% driven by Netherlands which delivered a rise of 2.5% offsetting the limited rise of 0.4% from Germany.  With regards to the half yearly performance, the group delivered a revenue of $25.7 million with the Same Store Sales falling 0.2%. The underlying KFC Europe EBITDA margin reached 1.6% impacted by renewal and retraining in Germany, new store opening costs and overhead carried prior to Netherlands completion. The group incurred a capex of circa $4.5 million and expects to incur an overall capex of over $18 million for full year of 2018. They are aiming to open 3 to 4 stores in Germany and 3 to 4 in Netherlands during the 2018 year. The group opened two new stores in Netherlands in 2017 while the performance of these stores has been on track. The group’s transformation program is ongoing in Germany, which includes renewal and retraining of management and staff, enhancing value offerings and improving operational execution.
 
Expanding Australian performance: The group continues to build and open new stores across Australia. In the first half of 2018, the group completed six major store remodels while eight minor remodels were finished. Post the acquisition of 28 restaurants from Yum! in June 2017, they focused on the successful integration of the acquired portfolio. The segment’s integrations are on track along with decent performance seen for acquired stores. The group launched KFC app which is processing over 13,000 transactions each week, while the trial of home delivery has been successful, and the group intends to expand this service soon. After acquisitions, the group would enhance their systematization which includes aligning and upgrading all operational systems to ensure unified, high-quality customer experience amongst Collins Foods’ KFC restaurants. They would focus on new Labor Rostering system, better Speed of Service, identifying efficiency opportunities in maintenance and energy costs.
 

Australian performance (Source: Company reports)
 
Launched Taco Bell: The group launched its first Taco Bell store in Annerley, Queensland in November. The early trading was better than their expectations. The group is targeting to launch a second restaurant in the first half of 2018, with a further restaurant opening shortly thereafter. The group would review the brand acceptance and performance which would occur in 2018, before a potential further rollout. Management sees Taco Bell as a new Mexican food brand to Australia.
 
First half of FY18 performance highlights: For the first half of 2018, the revenue rose 14.0% to $322.1 million as compared to $282.5 million in the prior corresponding period. KFC Australia SSS (same store sales) rose 1.2% during the period as compared to a fall of 0.6% in the prior corresponding period. The group’s underlying EBITDA enhanced 5.7% to $40.8 million as compared to $38.6 million in the first half of 2017. On the other hand, the group’s Sizzler revenue fell 23% to $24.0 million during the period as compared to a $31.2 million in the first half of 2017 on the back of fewer restaurants as compared to the prior half year. The Australian store count of 14, indicates two closures since FY17. But the group expects Sizzler Asia to continue to expand, with two restaurants opened in Thailand and one in China during the period. At half year, there were a total of 71 restaurants in Asia with two new restaurant openings planned for the second half of FY18. The group reported a statutory NPAT fall of 17.5% to $12.7 million as compared to $15.4 million in the prior corresponding period with $4.7 million of one-off acquisition costs, refinancing costs, and Snag Stand closure costs. The group delivered an underlying NPAT rise of 3.7% to $17.4 million from $16.8 million in the prior corresponding period (pcp). The net operating cash flow enhanced 3.4% to $27.2 million during the year from $26.3 million in the first half of 2017. The group’s net debt rose to $151.0 million from $124.6 million in the pcp while net leverage ratio rose from 1.54 to 1.55 post acquisitions in Europe and Australia. They maintained a fully franked interim dividend of 8.0 cents per ordinary share.
 
Efforts to revamp growth: The group intends to focus on their core KFC Australian business through same store sales growth, integrating the newly acquired restaurants in WA, SA and Tasmania, building new stores and positioning delivery for further roll-out. They continue to enhance their KFC presence in Europe via new store openings and building a strong and efficient back office to support their European operations, while delivering the operational excellence. They continued their investment into KFC brand innovation while technology remains important to effectively compete against their QSR peers and maximise shareholder returns. Despite a weak performance of Sizzler Asia in the first half of 2018, the group expects this segment to improve going forward. Moreover, given the positive response of their first Taco Bell store, they are aiming to rollout out another two stores to ensure consumer acceptance before undertaking a major rollout of this chain.
 

Value Offers (Source: Company Reports)
 
Stock performance: The shares of CKF fell by 12.8% in the last four weeks (as of December 15, 2017), on the back of lower than expected first half of 2018 performance. On the other hand, the group is committed to enhance their revenues and earnings, and is tracking well in terms of enhancing their footprint, in Australia as well as internationally, leveraging their expertise in Australia. Their Netherlands business performance is better than expectations, while the transformation of their German business is underway. The group is opening new stores while integrating the recently acquired Yum! owned KFC stores. They launched the first Taco Bell Restaurant in Queensland whose early trading has been above expectations, and further store openings have been flagged for near and medium term. We believe investors need to leverage the subdued levels of the stock in view of the potential to grow in the coming months. Trading at a decent dividend yield, we give a “Buy” recommendation on the stock at the current price of $5.28

 
CKF Daily Chart (Source: Thomson Reuters)

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