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Taco Bell Sizzles For Collins Foods

Australia | Dec 04 2019

The KFC Australia franchise performed strongly for Collins Foods in the first half, while Taco Bell offers a future expansion opportunity.

-Brokers confident the KFC Netherlands business will improve
-Price increases anticipated, to offset chicken and wage cost increases
-Taco Bell considered the "exciting" opportunity for the company in Australia


By Eva Brocklehurst

It was another record result in the first half for the KFC Australia franchise and Collins Foods ((CKF)) has highlighted robust momentum in the business. While no formal guidance was provided, Collins Foods has reiterated plans in FY20 for the rolling out of a net nine KFC Australia stores and four to five KFC Europe stores. Meanwhile, KFC Europe continues to underperform broker expectations.

Same-store sales growth of 4.9% was recorded in Australia while operating earnings (EBITDA) margins expanded by 50 basis points, reflecting operating expenditure leverage and network efficiencies. Growth was supported by a refreshed value menu offering and uptake of delivery options.

There was some comparable improvement in sales in Germany, underpinned by a promotional campaign, but the Netherlands was much weaker, offsetting the gains. The Netherlands business is expected to improve in the second half, but Morgans asserts it will take some time to be sustainable, although the medium-term opportunity is significant.

The disappointing Netherlands result was attributed to customer leakage from the lack of a value offering, and UBS incorporates a slower ramp-up in Europe along with a softer margin recovery in the Netherlands. Wilsons assesses the cost base in Europe has now stabilised and is optimistic about improvements in the Netherlands. On balance, and based on current forecasts, Wilsons retains a Market Weight rating and $10.65 target.

Taco Bell

Taco Bell continues to perform strongly and seven stores have now been opened, with an additional five expected over the second half. Taco Bell is now expected to make a -$2.2-2.3m loss in FY20 and break even in FY21.

Both UBS and Wilsons believe this business is an exciting opportunity for the company in Australia and will be a driver of growth over the medium-longer term, along with portfolio expansion and operating leverage in the European businesses. Wilsons currently models 77 stores and an operating earnings margin of 13.3% in FY25 for Taco Bell, with potential upside to both assumptions.

Revenue in the first half of $449m was up 9% and operating earnings of $57.7m were up 7%. KFC Australia operating earnings increased 12% while Europe declined -35%. Sizzler reported a -8.9% decline in revenue, primarily the result of two closures, and partially offset by same-store sales growth in Sizzler Australia of 4%. Sizzler Asia's royalty revenue increased by 17.9%.

Morgans upgrades to Add from Hold, with an $11.76 target, confident of positive momentum in the KFC brand in Australia. The broker also notes the company has de-geared the balance sheet to the top of its target ratio, with the potential for further accretive acquisitions.

UBS goes the other way and downgrades to Neutral from Buy with a $10.60 target believing, after a material re-rating, the valuation is fair. The broker expects the company will need to implement above-average price increases because of the increased costs of chicken and wages. Price increases of 1.6-2.0% would be required to offset 1-2% in wage increases and 2-3% incremental chicken cost increases and UBS assesses this should be achievable.

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