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

Strong FY 18 Financial Performance with growth triggered through acquisitions: Collins Foods Ltd (ASX: CKF), is engaged in operation, management and administration of restaurants. The company operates famous restaurant chains, KFC and Sizzler in Australia and parts of Asia. The company also operates Snag Stand, which is a fast casual restaurant chain. CKF for FY 18 has delivered 21.7% growth in the topline (revenue) to $770.9 million. Statutory EBITDA rose 14.7% to $89.6 million and underlying EBITDA grew 16.4% to $94.5 million (FY17: $81.3 million). The company has posted Statutory NPAT growth of 16.1% to $32.5 million and 13.3% rise in underlying NPAT to $38.9 million for FY 18. However, underlying earnings per share fell 1.9 cps to 33.8 cps on the back of greater shares on issue and acquisitions not yet being fully reflected in earnings. Further, for the full year 2018, the company’s operating cash flow rose 23.1% or increased by $14.0 million to $74.5 million. Excluding the investment and financing activities related with the Netherlands and Australian acquisitions, the company has booked the underlying cash flow for FY18 of $11.8m. Moreover, the company’s capital expenditure spend for the full year 2018 is of $43.8m. The capex includes the new store and remodels of circa $35m and maintenance and other capital of circa $8m. During FY 18, the company’s payment which includes the cash element for acquisition of subsidiaries includes $103.9m for acquisition of KFC restaurants in Australia and the company paid $94.1m for the acquisition of KFC restaurants in the Netherlands. The net cash flow from financing is of $121.0m during 2018 that includes the $44.2m related to the proceeds from the raising of capital to partially fund the acquisitions (net of costs), payment of dividends for $18.9m and $95.7m is related to net facilities drawn, enabling the strong cash flows for a total FY18 fully franked and dividend of 17.0 cps. Additionally, the company’s cash balance is down $44.3m to $60.5m in FY 18 after the completion of Netherlands and Australian acquisition. There is an increase in other non-current assets majorly due to rise in goodwill of $146.7m resulting from the acquisition of new restaurants.

 

FY 18 Financial Performance (Source: Company Reports)

Strong Growth across KFC Australia network for 2018 & approaching significant mark of EBITDA: CKF during FY 18 has successfully completed the acquisition and has integrated 25 KFC Australia restaurants with two completed post year end, while one restaurant is expected to complete within a couple of months. The acquired restaurants are performing as per the company’s expectations. The company has reported 13.6% growth in the revenue to $624.1m, comprising of $50.3m or 9.2% contribution by acquisition. KFC Australia’s SSS (same store sales) posted growth of 1.0% using Collins Foods methodology (1.4% using Yum! methodology) impacted due to softer comps in WA. WA sales comps had turned positive in the fourth quarter. KFC Australia’s EBITDA grew 10.5% to $99.3m. However, the EBITDA margin contracted to 15.9% in 2018 compared to 16.4% in FY 17 influenced mainly due to small shift in product mix (promotion driven), the effect of some sales deleverage and principally in WA. The company has opened 5 new restaurants and closed 3 restaurants. Moreover, there is a steady growth in App orders, which is now over 20,000 orders/week. The app has more than 20% higher average ticket than non-app orders and gets positive feedback from customers on their app. Additionally, CKF has launched own delivery in KFC Indooroopilly in FY 18, additional stores are under consideration and Foodora test is continuing with five stores having positive sales and profitability impact. The company is expanding into Perth with launching of Deliveroo in 9 restaurants.


KFC Australia Performance in FY 18 (Source: Company Reports)

Expansion of European footprint is driving scale: During FY 18, the company has operated 33 KFC restaurants in Europe at year end, that include 15 restaurants in Germany and 18 restaurants in the Netherlands. The company had built and opened two new restaurants in the Netherlands and two new restaurants in Germany in FY 18. The company has opened two additional restaurants post year end in Germany. Moreover, during FY 18, the company for Europe has posted  the same store sales (SSS) growth of 0.8% after the adjustment for cannibalization impact on 2 restaurants. The proforma SSS is of 1.4% after factoring in full year for the Netherlands. The restaurant level EBITDA for acquired restaurants in both countries, Germany and Netherlands has been in line with the expectations. The overall EBITDA in 2018 is affected due to the cost of new restaurant openings, overheads investment more than that of acquisition, higher than planned statutory/administrative requirements and building of 4 new restaurants in the FY 18. In addition, the integration is well on track and the company will continue with the transformation plan in Germany through FY19, driven by the recent appointment of Head of Operations of KFC Europe.

 

Europe Performance in FY 18 (Source: Company Reports)

Sizzler continues its transition and delivered decent earnings during FY 18: CKF has continued to transition successfully the Sizzler business while maintaining the EBITDA. During FY 18, Sizzler’s revenue was down 22% to $50.8 million, with two fewer restaurants compared to FY17, and the EBITDA was flat at $4.6 million. The company has posted the EBITDA of $4.6m for the year at margin of 9%, which is up 200 bps on prior year. The company has further closed one Sizzler restaurant post year end, and has now 13 restaurants open in Australia. Sizzler Asia royalty revenue increased by 9.7% due to new restaurant openings and the company has focus on the value proposition which has driven transactions. There were 73 Sizzler Asia restaurants operating at the year end. Sizzler Asia has continued to expand its footprint and during FY18 in Thailand opened 5 new restaurants and in China opened 1 with a closure of 1 restaurant.

Taco Bell continues to trade strongly: CKF has opened its first Taco Bell restaurant during FY18 at Annerley in Brisbane, which has performed strongly and has achieved positive customer engagement with the brand. The company plans to open further restaurants prior to the end of this calendar year.

Setting to manage the debt position after funding of acquisitions: After the acquisition of 28 KFC Australia restaurants and 16 KFC Netherlands restaurants, the net debt has risen by $94.1 million to $227.2 million. Therefore, the Company’s net leverage ratio has increased to 2.14 in FY 18 compared to 1.59 in FY 17. However, as CKF is generating healthy cash from operations, the company’s level of debt is expected to be managed well.

Maintaining decent dividend: CKF has declared fully franked final dividend of 9.0 cents per ordinary share, same as that in FY17. As a result, the total FY18 fully franked dividend the company has declared is of 17.0 cps (17.0 cps in FY17). The dividend held at prior year as full year of acquisition earnings is yet to flow through to results, which has been achieved notwithstanding the significant increase to issued capital.

Priorities for FY 19: The company has planned to grow the core KFC Australian business comprising of the growth in transaction led same store sales, to further improve the performance of WA and to continue the roll out delivery to more stores including the aggregator and own channel. The company plans to make more of 8 restaurants in Australia during 2019, to have a disciplined focus on the operational improvement and expansion of margins and to fully integrate the new acquired restaurants in WA, SA and Tasmania. Simultaneously, the company plans to roll out home delivery from more KFC restaurants through both aggregators and the company’s own channel. Moreover, the company has planned to grow the KFC European business through transformation plan in Germany and having a focus on increasing the value proposition to boost sales. The company has plans to build more 6 to 8 restaurants, integration of the Netherlands business and to forming a strong and efficient back office to underpin the European business, to continue to test the viability of Taco Bell by building of more restaurants, launching new products and building social engagement. Meanwhile, the company is experiencing positive results from the transformation plan in Germany.

Stock Recommendation: Meanwhile, CKF stock has risen 2.54% in three months as on August 31, 2018. CKF is looking forward to delivering strong growth in FY19 on the back of successful integration of acquired restaurants, rolling out of the new units and increasing the returns from re-modelled restaurants successfully. Therefore, with a full year of 2019 earnings from recently acquired restaurants and the ongoing focus on boosting organic growth across the network, CKF is expected to perform strongly for FY 19. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 5.610.


 
CKF Daily Chart (Source: Thomson Reuters)

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