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 (ASX: CKF) delivered a mixed 1H18 result wherein higher margins in KFC Australia were offset by lower margins in KFC Europe. However, KFC Australia continues to deliver healthy growth, while Europe showcases good potential at the back of new store rollout. Further, Taco Bell is expected to be a long-term growth catalyst and earnings growth over the next 2 years can be in double digit. Efficiency improvements are also expected to add to long-term momentum.

Acquired KFC restaurants: Collins Foods Limited’s wholly owned subsidiary, Collins Restaurants finished the acquisition of 14 KFC restaurants in Tasmania from a subsidiary of Yum! Brands Inc. With this move, the group had indicated for four restaurants of the original acquisition which were announced last year which are to be finished. The group sees one acquisition from Western Australia to be finished in the next couple of weeks while the final three restaurants in South Australia are forecasted to be finished soon. The group finished acquiring five out of 28 restaurants from Yum! during the first half of 2018 while the rest of 23 would be finished in the second half.
 

Operational Highlights (Source: Company reports)
 
Solid top line performance: For the first half of 2018, the group’s Revenue rose 14.0% on a year on year (yoy) basis to $322.1 million as compared to $282.5 million in the prior corresponding period. Same store sales growth for KFC Australia was 1.2% as compared to the fall of 0.6% in the first half of 2017. Moreover, the firm opened one new restaurant in Australia, but closed one. As of first half of 2018, there were 15 KFC restaurants in Germany and 16 KFC restaurants in Netherlands. As per the operational performance, Underlying EBITDA rose 5.7% to $40.8 million during the first half as compared to $38.6 million in the prior corresponding period. On the other hand, the group’s statutory NPAT fell 17.5% to $12.7 million during the period as compared to $15.4 million in prior corresponding period (pcp) impacted by $4.7 million of one-off acquisition costs, refinancing costs, and Snag Stand closure costs. On the other hand, the underlying NPAT rose 3.7% to $17.4 million during the period from $16.8 million in pcp. The Net operating cash flow rose 3.4% to $27.2 million during the period from $26.3 million in pcp. However, the Net debt rose to $151.0 million during the period as compared to $124.6 million in pcp on the back of acquisition of 16 KFC Netherlands’ restaurants and 5 KFC WA restaurants while the net leverage ratio slightly rose from 1.54 to 1.55 post acquisitions in Europe and Australia. The group maintained their fully franked interim dividend of 8.0 cents per ordinary share. On the balance sheet front, the Net operating cash flow reached $27.2 million which is a rise of $0.9m against pcp while the Capex cash spend was $17.1 million with new store and remodels incurring a circa $11.8m (including 3 new builds in Australia and 2 in Germany).

KFC Australia highlights: The group continues to build and open new stores of KFC across Australia. During first half of 2018, the group finished six major store remodels and eight minor remodels. Post the acquisition of 28 restaurants from Yum! in June 2017, the group focused on the successful integration of the acquired portfolio. The integrations have progressed well, with acquired stores performing on expectations. Across the KFC Australia business, there has been an operational focus on boosting the customer experience, with an emphasis on enhancing the speed of service and identifying efficiency and cost saving opportunities to maintain margins. While the group is currently delivering from five stores, it has launched a new KFC app which is also performing well and is processing over 13,000 transactions each week. The trial of home delivery has been successful, and the group intends to launch this soon.
 

KFC Australia Footprint (Source: Company reports)
 
KFC Europe performance: The group reported that their transformation of Germany is underway, while Netherlands performance has been as per expectations. As of first half of 2018, Collins Foods had a total of 31 KFC restaurants throughout Europe; and before the end of the 2017 year, a further two new stores were slated for opening in the Netherlands. Moreover, Collins is on track to open a further three to four stores in Germany and three to four in the Netherlands during the 2018 calendar year. The Netherlands KFC business has been effectively integrated and is performing as per expectations. In Germany, the group’s planned business transformation program is underway, which includes renewal and retraining of management and staff, refining the value offering and operational execution improvement.
 

KFC Europe performance (Source: Company reports)
 
Expanding opportunity via Taco Bell launch: The group sees Taco Bell as an exciting opportunity for Collins Foods to introduce a well-known global brand to Australia. During November 2017, Collins Foods launched their first Taco Bell store in Annerley, Queensland. The initial trading of Taco Bell was better than forecasted and accordingly Collins Foods aimed to launch a second restaurant in the first half of the 2018 calendar year, with more restaurants following this. Accordingly, the group is performing a review and evaluation of brand acceptance and performance in 2018, before a potential further rollout.
Sizzler performance: The group sees Sizzler Asia growing while Australia performance has also been as per expectations. Overall Sizzler revenue fell by 23% to $24.0 million during half year as compared to 31.2 million in pcp and this was at the back of fewer restaurants against prior half year. The Australian store count was 14, indicating two closures since FY17 year end. Sizzler Asia continues to expand, with two restaurants opened in Thailand and one in China during the period. A total of 71 restaurants in Asia were reported as of first half year, with two new restaurant openings planned for the second half of FY18.

Outlook: For the rest of fiscal year of 2018, the group continues to focus on growing 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. The group continues to invest into KFC brand innovation and technology which remains a major factor to effectively compete against their QSR peers and maximize the shareholder returns. The Sizzler Asia growth is improving and is expected to support this. Moreover, the group got a positive early response for their first Taco Bell store that was recently opened, and it also intends to rollout another two stores in a considered fashion to ensure consumer acceptance before undertaking a major rollout of this chain.

Stock performance: The group is aiming for a successful execution of new store openings and offshore integrations, while ensuring to innovate their offerings to stay competitive. They continue to focus on operational improvements and margin control across their portfolio. They continue to target expansion in Europe, via new store openings and building a strong and efficient back office to support their European operations, while delivering operational excellence. On the other side, after conducting a strategic review, Collins Foods has decided to exit the Snag Stand business. The associated costs of $1.2 million have been booked in the half year. The business is expected to be closed by year end. The group invested for future growth, while consistently maintaining gearing at comfortable levels given the Company’s strong operating cash flows. The group’s new stores in new geographies, would be earnings accretive for shareholders on a long-term basis. Moreover, Taco Bell also promises a solid opportunity to introduce a new Mexican food brand to Australia. The group has also appointed Kevin Perkins as Non-Executive Director lately. Meanwhile, about 21,819 shares have been disposed by Newman Manion under off market transfer, as at February 12, 2018, and this announcement seems to have led the stock edge slightly below on March 19, 2018. However, Director Robert Kaye acquired some shares during late last year. The shares of CKF otherwise corrected over 5.6% in this year to date and we believe investors can leverage this correction as an “Entry” opportunity. Based on the foregoing, we recommend a “Buy” on the stock at the current price of $5.06
 

CKF Daily Chart (Source: Thomson Reuters)

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