KFC, Taco Bell Deliver For Collins Foods

This story features COLLINS FOODS LIMITED. For more info SHARE ANALYSIS: CKF

The trading performance of Collins Foods has exceeded broker expectations, amid robust consumer engagement with KFC Australia and despite a period of severe restrictions.

-Early beneficiary of the easing of government restrictions
-Food court service remains a drag but should improve in coming months
-Collins Foods unlikely to breach debt covenants
 

By Eva Brocklehurst

Fast food has delivered for Collins Foods ((CKF)) during the pandemic lockdown, as the company experienced relatively small reductions in same-store sales across its Australian KFC franchise. Furthermore, trends have started to improve in Europe. During the final weeks (March 30 to May 3) of the company's FY20, same-store sales in KFC Australia were down only marginally, at -0.9%.

Brokers note strong consumer engagement with KFC Australia, which is around 80% of revenue, and Taco Bell have driven most of the improvement. Taco Bell sales have recovered to pre-lockdown levels, Wilsons points out, and this is impressive, considering the business has a smaller exposure to drive-through sales.

Meanwhile KFC Australia, Germany and the Netherlands may have been constrained by the lockdowns, but the network has been an early beneficiary of the easing of government restrictions as people head back to work and grab a KFC on the way home.

UBS assesses the stock's multiples are not overly demanding, amid further opportunity for store expansion, and upgrades to Buy from Neutral with an $8.95 target. The broker attributes the company's impressive resilience to a continued focus on safety of delivery/takeaway and expects further benefits from domestic car-based holiday activity.

UBS notes conditions in Europe for KFC and Sizzler may be challenging but KFC Australia remains the jewel in the crown, representing 97% of estimated FY20 operating earnings (EBITDA).

Normalising for food courts, which have suffered from significant declines in shopping centre foot traffic, same-store sales for the network outside of KFC Australia, were up 4.0%. KFC Germany has improved to a decline of -28% in the last five weeks, from -50%.

In the Netherlands, sales remain down around -40%, affected by in-line restaurants in city centres and temporary closures of Sizzler. Sizzler, while experiencing a significant fall in sales, has now implemented takeaway and home delivery.

Margins are affected by operating leverage on fixed costs, particularly for KFC Europe, but Wilsons considers the Collins Foods valuation attractive and expects significant earnings growth, maintaining an Overweight rating and $8.63 target.

Quick Service Resilience

Consumers, Morgans suggests, have adapted quickly to the removal of dine-in restaurant options, and this is more than offset by takeaway/drive-through/delivery. The broker, retaining an Add rating and $8.17 target, expects food court sales will continue to be a drag but as shopping centres re-open this should improve in coming months.

Queensland, the largest Australian state for Collins Foods, has already relaxed some measures over the past weekend which means there should be a noticeable improvement in trading. Morgans highlights that quick-service restaurants have historically been relatively resilient through various economic cycles and are therefore protected somewhat in the event of a recession.

The trading performance has exceeded CLSA's expectations, which subsequently removes a short-term risk to the balance sheet, and the broker reiterates a Buy rating with a $9.30 target.

The incremental improvement in sales and reduced risk of Australia-wide closures mean the likelihood of an equity raising has diminished and UBS agrees Collins Foods is unlikely to breach covenants, estimating FY21 operating earnings would have to fall by around -28% in order to do so.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms