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 is a KFC franchisee in Australia and Europe, a Taco Bell franchisee in Australia as well as the owner of Sizzler restaurants in Australia and the operator for Sizzler in Asia. It has been continuously expanding and currently operates 223 KFC stores throughout Australia , 136 in Queensland, 11 in New South Wales, 4 in Victoria, 5 in South Australia, 48 in Western Australia etc. Moreover, Collins Foods owns 15 KFC stores in Germany and 18 in Netherlands. CKF also operates 1 Taco Bell in Queensland and 14 Sizzler company owned restaurants in Australia. It is committed to have lasting and mutually beneficial partnerships with its suppliers. It has established a European footprint providing attractive long-term growth opportunities for increased KFC penetration in the Netherlands and Germany. Through full year of earnings from recently acquired restaurants and its ongoing focus on driving organic growth across its network, it is looking forward to deliver strong growth in FY19. The restaurants that the Company acquired over the past 12 months are already contributing positively to the Company’s earnings and it is expected that with this the gearing will be reduced as it happened with previous acquisitions. It is expected that the Group will revitalize due to the increase in the demand of its products as fans will be tempted to buy a bucket of fried chicken while watching FIFA World Cup matches. The recent FY18 result, which reflected an overall decent performance, did show some weakness in margins with cost impacts, however, the presence in Germany and the Netherlands, and other acquisition moves are expected to help the group for its long term strategy on earnings growth.


Sales Contribution (Source: Company Reports)

Financial Overview - Collins released its results for the financial year ended 29 April 2018 (FY18). The Group successfully completed the acquisition of 25 restaurants during the financial year while continuing to drive same-store sales growth across the network. Group Revenue and Statutory NPAT were up by 21.7 per cent and by 16.1 per cent and amounted to $770.9 million (FY17: $633.6 million) and $32.5 million (FY17: $28.0 million) respectively. Operating cash flow was up by 23.1 per cent and amounted to $74.5 million (FY17: $60.6 million). The Group declared a fully franked final dividend of 9.0 cents per ordinary share for FY18 and this will be paid on 26 July 2018 and FY18’s total fully franked dividend amounted to 17 cps (FY17: 17cps). Further, growth from its core domestic business continued to be witnessed, with EBITDA from the KFC Australia network up by 10.5 per cent and amounting to $99.3 million while EBITDA margins contracted slightly to 15.9 per cent (FY17: 16.4 per cent). This was due to promotional activity that generated a small shift in product mix and the impact of some sales deleverage, principally in WA. The cash balance was down from $104.8 million (as on 30 April 2017) to $60.5 million ( as on 30 April 2018) following completion of Netherlands and Australian acquisition.


KFC Australia Sales and EBITDA Margin Performance (Source: Company Reports)

Other Key Achievements - It acquired 28 restaurants from Yum, 27 transfers are now complete, and the final will be completed during the next two months and all the acquired restaurants are performing well up to the expectations. Post-acquisitions net debt increased and amounted to $227.2 million and in turn, the net leverage ratio increased to 2.14 (FY17: 1.59) with a maximum covenant of 2.75. If we talk about its Sizzler unit, its revenue was down by 22 per cent and amounted to $50.8 million, with two fewer restaurants compared to FY17, while EBITDA was flat at $4.6 million. It was worth noting that a Sizzler restaurant closed post year end and now total 13 restaurants are there in Australia. It performed well in Asia as its royalty revenue was up by 9.7 per cent due to new restaurant openings and due to its focus on its value proposition which has driven transactions and in total 73 Sizzler Asia restaurants were operating in the year.


Number of Restaurants and EBITDA Contribution (Source: Company Reports)

The Taco Bell Brand gained acceptance by Australian consumers and the group will open more restaurants prior to the end of this calendar year. KFC witnessed a steady growth in the orders made through its Application and it receives 20,000 orders per week and this application has received positive feedback from its customers. In fact, the Foodora test continued with five stores and these recorded positive sales and profitability impact. The Group has kept about $22 million of capex in FY18 for network development in Australia and about $7 million for maintenance and other capital. It is working to increase the systematisation to ensure high-quality consistent customer experiences across all Collins Foods KFC restaurants.


Debt to Net Leverage Ratio Trend (Source: Company Reports)

Positive Outlook- Collins is very much focussed to grow its KFC Australia business through transaction led same store sales growth and by further improving the performance of its WA business. It plans to drive transaction led sales growth, build eight further KFC restaurants, and maintain a focus on operational improvements and margins in FY19 in Australia. CKF also looks to roll out home delivery from more KFC restaurants through both aggregators and through its own channel. It is already seeing some positive results in Europe from its transformation plan in Germany. Moreover, integration of its KFC Netherlands restaurant network is progressing well, and it continues to realise operational efficiencies across the network as it develops its back office support functions. In FY19, it is planning to open a further six to eight KFC restaurants across Europe. The Company has planned to open six to eight restaurants across Germany and the Netherlands in FY19.

Stock Performance- Collins Foods is continuously improving in all areas of its operation and is working towards the company’s mission that is to become a leading restaurant holding company, which operates premier brands where people love to eat and are proud to work at. The Group is proud to support Australian manufacturers and service providers, and purchase of Australian made products wherever possible. Since few years it has continued to grow its KFC Australia business through organic underlying growth, and acquisitions which have expanded its Australian footprint and has consolidated its position as the largest KFC operator in Australia. It has entered an exciting new phase with the successful launch of its first Taco Bell restaurant, with further restaurants to follow over the next 12 months. In due course of time as CKF will generate cash from operations, the Company’s level of debt is expected to decrease. Operations in Netherland are performing well but still, there is some overall softening of margins due to the cost of new openings. ROE improved from 4.4 per cent on 31 October 2017 to 6.1 per cent on 29 April 2018 and ROIC improved from 2.6 per cent on 31 October 2017 to 3.4 on 29 April 2018. The stock is moving in an upward direction since the start of the year (up by 2.96 per cent) and by 2.20 per cent in the last five days. We give a “Buy” recommendation at the current market price of $5.51 by looking at the financial performance, expansion strategies and other ongoing developments.
 

CKF Daily Chart (Source: Thomson Reuters)

 
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