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Collins Foods Licks Its Fingers

Australia | Jun 26 2019

Collins Foods has driven a solid earnings result supported by KFC Australia. Brokers are keen on growth opportunities ahead and the defensive attributes of the stock.

-FY19 report shows KFC Australia outperforms
-Europe sluggish, but marketing spend kicking in
-Taco Bell starts well

By Greg Peel

Australians are a lazy bunch, it seems. Even the effort of getting off the couch for a fast food meal is becoming a bit much. And who ever eats pizza at a pizza restaurant?

While home delivery has been the domain of pizza chains and local Asian restaurants for decades, the likes of Uber Eats and others appear to be managing to succeed in delivering restaurant food to our doors in a still edible state where in the past many have failed, and judging by Collins Foods’ ((CKF)) earnings result, chicken to the door is the new rage.

Collins’ full-year result exceeded expectations thanks to outperformance from KFC Australia. While new store rollouts and other improvements such as the introduction of dual-lane drive-throughs helped KFC grow revenues, the greatest growth driver was the addition of 20 more stores providing a delivery service via aggregator platforms, bringing the total to 64.

KFC Australia grew sales by 4.3% in the second half, up from 3.1% in the first. By keeping costs under control, the company also managed to improve earnings margins. KFC Australia represents around 90% of total earnings.

While the rollout of new stores will continue into FY20, and the provision of delivery service will continue to be added to further stores, analysts expect growth rates will eventually ease as the business matures. Picking up the growth baton will be other businesses.

Down but not out

Comparable sales growth for KFC Europe in contrast disappointed, with the second half seeing a -4.9% decline. Margins were also low due to spending on new stores, new menu options and promotional activity. But this investment appears to be paying off, given sales growth in FY20 year to date (beginning May) are up 5.0%.

Deutsche Bank views KFC Europe’s (Germany/Netherlands) investment as a positive longer term strategy, providing a compelling opportunity from a significant store rollout ahead. Canaccord Genuity notes the disappointing FY19 result should be taken in the context of operations only just beginning to ramp up.

Collins Foods’ other growth opportunity is provided by Taco Bell. The company has only opened four stores in Australia to date, but early signs in those establishments are promising.

All up Collins Foods plans to open 9-10 new KFC stores in Australia in FY20, 5-6 in Europe and a further 8-10 in FY21, and 10 Taco Bells in Australia in FY20. Therein lies the growth opportunity, along with improving operations in Europe and more rollouts of delivery service stores in Australia.

Within the FNArena broker database, UBS has retained its Buy rating and lifted its target to $8.75 from $8.00. Deutsche Bank has increased its target to $8.50 while retaining Buy.

Morgans has moved to $8.20 from $7.78 and believes a forecast PE multiple of 18.6x for FY20 seems fair on an offer of 9% compound annual earnings growth for the next three years, but on the recent share price rally (which peaked at 40% mid-June for 2019 year to date) has decided to pull back to Hold.

Outside of the FNArena database, Canaccord Genuity retains Buy with a target increase to $8.10 from $7.70 and Wilsons retains Buy with a target of $8.49.

An average of the five broker targets comes in at $8.41, or around 6.5% upside from the current trading price.

It is interesting to note that while S&P/ASX considers fast food consumption to be a discretionary choice for Australian consumers, in the US fast food is considered by S&P to be a staple. One might argue the toss, but given the consumption of Kentucky fried chicken in this country is considered sufficiently immune to economic downturn, such defensiveness puts Collins Foods in more of a staple camp.

One might then expect something better than a 2.4% forecast dividend yield for FY20, but the company is very much in a growth phase. That said, impressive cash conversion in FY19 allowed the board to increase to a 50% payout ratio, which suggests the promise of ongoing dividend growth ahead.

As long as Collins can successfully execute, brokers warn, which is always the caveat for growth stocks.

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