Collins Foods Ltd

CKF Details

·         Collins Foods Limited (ASX: CKF) recently finished their retail entitlement offer and offered over $44.1 million equity. The group’s Net debt enhanced to $133.1 million after Germany acquisition leading to the Net leverage ratio of 1.59. But despite raising funds, the company’s net debt position looks high. The group’s statutory NPAT fell over 3.9% to $78.1 million, despite a topline rise of 10.3% for fiscal year of 2017, while the group’s statutory EBITDA rose 5% to $78.1 million.

   Historical performance for FY17 (Source: Company reports)

·        Growing preference for healthy options remain a concern: For FY18, the group is aiming to enhance their core KFC Australian business and intends to build 8 to 9 stores while planning to remodel 20 major and 20 minor stores. Similarly, Collin foods intends to strengthen their KFC European business, by integrating their Netherlands business. They are aiming to build 8 to 10 restaurants in the regions which includes 4 to 5 in Germany and 4 to 5 in the Netherlands. On the other hand, the growing preference of healthy options by Australians could dampen the sales of the group on a long term basis. Moreover, the group’s competitors like Mc Donald’s are trying to differentiate by partnering to enhance their business. Dominos always focused on delivering their pizza faster. On the other side, their Sizzler division, overall revenue lost over 10.5% while the Store count decreased due to 6 store closes as compared to the prior corresponding period. Store count in Australia by year end fell to 16, as compared to 22 in the prior corresponding period. Snag Stand was also not able to perform well even though they made changes in their menu and brand. The group is not planning to infuse more capital but continues to do the strategic review.
 
·         Leverage the recent rally: CKF stock rallied over 37.8% in the last one year (as of July 25, 2017) placing them at higher levels. We believe investors could start booking their profits in the stock. Accordingly, we give an “Expensive” recommendation on the stock at current market price of $5.90


CKF Daily chart; (Source: Thomson Reuters) 

Retail Food Group Limited

RFG Details

·         Focusing on organic growth: The group expects a better performance in fiscal year of 2018 given their diversified business model, while expects an ongoing organic growth boosted by their International, Commercial and Coffee & Allied Beverages divisions. Domestic franchising of this division is forecasted to witness a better growth, driven by their initiatives for QSR Division and Michel’s Patisserie Brand System. The group currently expects a FY17 underlying NPAT rise of c.15% as compared to the previous corresponding period (pcp) while underlying Earnings per Share (EPS) is forecasted to rise of c.8% against PCP. RFG expects their international MFA to show long term growth given the number of licensing potential negotiations, wherein the licensed territories have increased from 46 to 80 in less than three years. Commercial operations, which comprises the Hudson Pacific Corporation acquired in 1H17, are on track with expectation.
 
·         Solid dividend yield: RFG stock correction placed them at low valuations, while the stock has an outstanding dividend yield of 6.8%. The group believes that better performance in most of the Brand Systems would offset the decline for Michel’s Patisserie. Improving consumer sentiment could also boost the stock as the Westpac-Melbourne Institute Consumer Sentiment Index enhanced 0.4% in July to 96.6 post a 1.8% drop in a month earlier which is the initial rise in last four months.We maintain a “Buy” rating on the stock at the current price of $4.46


RFG Daily chart; (Source: Thomson Reuters)

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