Collins Foods Limited

Driving growth through innovation and footprint expansion: Collins Foods Limited (ASX:CKF)recently entered into a Development agreement with Taco bell, a subsidiary of Yum!brands Inc, in the month of October. Under the agreement, Collins will govern the roll-out of more than 50 new bell restaurants across multiple states in Australia between January 2019 to December 2021.The company posted strong FY18 financials driven by same store sales and footprint expansion. Revenue increased by 21.7% to 770.9 million as compared to the previous period. Statutory EBITDA showed a growth of 14.7% to $89.6 million and underlying EBITDA increased by 16.5% to $94.5 million. Underlying NPAT grew by 13.3% to $38.9 million driven by strong performance across the group.

The group is expected to witness growth in EPS on a continual basis in the coming years. When looking at fundamentals, group’s gross margin in double digit percentage terms (52.7%) is closer to the industry’s gross margin (56.7%). The return on equity of 10.8% is also closer to industry’s figure double digit percentage. The group still has to work on its debt to equity scenario. The key aspect to note is that the group looks in good shape now; and continued growth in its core KFC Australia business, established KFC footprint in Europe, and penetration through Taco Bell restaurants in Australia are expected to boost the performance going forward. It is also aware of the sustainable increase in gearing levels at the back of accretive acquisitions made in 2018 for long term earnings growth. To cater to this, Collins Foods expects to continually  generate cash in order to bring its net leverage ratio to a lower level. The group also expects to grow business through its innovative products and aims to demonstrate strong value offering driving transaction led growth.

Stock Analysis:Technically, scrip is on upside move from the beginning of the year and at current price level the scrip is at the upper end of the Bollinger bands with a bullish candle on the top end of the band, which indicates slight dip in shorter time frame. With key indicators pointing on upside, the scrip will have bulls taking lead over bears in near term. The stock has a market capitalization of $737.5 Bn, price-to-earnings ratio of 22.38x and a low beta as of October 26, 2018. We maintain a “Buy” recommendation at the current price of $6.28 backed by strategic moves and sound performance.
 
 

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