Collins Foods Limited

Strong cash flows supporting strategic growth: Collins Foods Limited (ASX: CKF) operates in three main segments i.e., KFC Restaurants, Sizzler Restaurants and Shared Services. The Company's restaurants segment comprises of 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.
 
It has a market capitalization of circa $784.12 million as of November 06, 2018. The Company has achieved a five-year compound annual growth (CAGR) in revenue of 12.7% to FY18. It was mainly driven by the inorganic expansion strategy that has been adopted by the company. On CAGR basis, the underlying EBITDA has grown at 14.9% over the same period while underlying Net Profit after taxes have grown at 18.9% which signifies that the company has been able to successfully cut down on its non-operating expenses and is constantly achieving efficiencies within its systems and processes through economies of scale.
 
Going forward, we believe that the company has a brighter outlook on the back of growing “taco bell” brand across the region, focus on innovative products, digital expansion strategy, improving speed of service & expansion of home delivery network. Moreover, Optimising processes and systems will further improve efficiency and aid in managing margins.
 
Value Proposition: The company is trading at a P/E multiple of around 23.8 times, while the industry average is 71.21 times, also Domino’s Pizza trades at P/E of 39.36 times which signifies that the company is relatively trading at low levels. Also, the company’s dividend yield stands at 2.53% v/s the industry average of 1.08% which indicates that the firm is relatively undervalued and expects to have stable earnings in the future.

CKF Cash Flow Trends (in Mn) (Source: Company Reports)
 
Meanwhile, the stock price has marginally increased over the past one month by 4.34%, however over the period of past 6 months the stock has given a substantial rise of 21.92%. Also if we look at the YTD performance, the stock is up by 24.40 %, which shows a steady performance on the exchange, also it is constantly hovering near its 52 weeks high, which indicates a bullish trend. Taking into the account of strong cashflow position which could help to achieve its top line growth and improving operational efficiencies going forward, we recommend a “Hold” rating on the stock at the current market price of $6.86 as it is trading at slightly higher levels.
 

Coca Cola Amatil Limited

Strong performance in the growing markets, however facing headwinds in some established markets:
Coca-Cola Amatil Limited (ASX: CCL) is the mid-cap company with the market capitalization of circa $7.24 Billion as of November 06, 2018. The company is the market leader in the beverage segment with a market share of 63.8%. The underlying EBIT for the 1HFY18 has fallen by 4.9% which reflects increasing operational costs, soft market conditions in Indonesia and lower contributions from the corporate food & services segment. The EBIT for the Australian beverages segment for the first half year of 2018 fell by around 3.6% to $176.3 Mn v/s 182.9 Mn over the same period in the previous year. This fall was predominantly due to the volume contraction resulting from the impact of the newly introduced “NSW container deposit scheme” and also the company has reduced the CDS charges in NSW from 13.59 cents to 10.91 cents reflecting lower than anticipated redemption rates. The New Zealand & Fiji market has shown substantial growth in the underlying operating profits with a rise of 9% over the first half of the year on account of the strong volume growth across sparkling and still beverage segment. The alcohol & coffee segment has achieved substantial growth of 4.7% due to a double-digit EBIT growth in the alcohol drinks and revenue & volume growth in the coffee segment. In our view, New Zealand & Fiji and Alcohol & Coffee are expected to continue to deliver growth in line with the expectations. Also, the company is making good progress in growth areas such as dairy products, energy drinks & adult drinks.
 
Value Proposition: The company is trading at a TTM P/E multiple of around 15.85 times, while the industry average is 16.85 times; also, the P/B is 4.65 times v/s the industry average of 3.18 times which signifies that the company is fairly valued at a current market price. Also, the company’s dividend yield stands at 4.7% v/s the industry average of 5.01% which indicates that the firm is currently fairly valued and is capable of having stable earnings in the future.
 

CCL CAPEX Trends (in Mn) (Source: Company Reports)
 
Meanwhile, the stock price has marginally fallen over the past one month by 1.86%, however over the period of past 6 months the stock has given a modest rise of 7.07%; also if we look at the YTD performance, the stock is up by 17.92 %, which shows a steady performance in the long term. Taking into the account of higher capex requirements and the soft Indonesian operations along with the impact of the “NSW CDR Scheme” on its major Australian operations, we recommend a “Hold” rating on the stock at the current market price of $10.07.

 

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