Australia | Jul 01 2020
Momentum in KFC Australia underpins Collins Foods as consumers readily engage with the company's delivery options and as restrictions around dining-in continue to ease.
-KFC Australia leading the sales trends
-KFC Europe should return to modest growth in FY22
-Taco Bell roll-out slowed for 12 months
By Eva Brocklehurst
Sales trends for Collins Foods ((CKF)) have picked up in FY21 amid continued momentum in KFC Australia, which in turn has benefited from consumer engagement and cost controls.
KFC Australia generated 11.6% growth in like-for-like sales in the first seven weeks of the company's new financial year while KFC Europe was down -13.4%. Taco Bell sales have gradually recovered to pre-pandemic levels.
Wilsons assumes same-store sales trends move back towards long-term norms by the end of the first half of FY21 for KFC Australia, with a temporary margin benefit from stronger sales growth, constrained by higher costs and no price increases.
KFC Europe is expected to sustain mid-single digit declines in same-store sales by the end of the first half before returning to modest growth in FY22, and Wilsons is encouraged by the momentum building in Germany. The broker has an Overweight rating and $10.47 target for Collins Foods.
Morgans believes the reallocation of capital towards the much higher returning KFC Australia business is the right move in the current environment and anticipates a recent easing of restrictions in Europe should help trading conditions.
Government stimulus is supporting a strong balance sheet and Morgans anticipates a 50% pay-out ratio will be reinstated, which reflects the better-than-forecast final dividend, retaining an Add rating and $10.23 target.
While incorporating the robust outlook, UBS opts for a conservative stance on sales growth in FY21, raising estimates for earnings per share by 11%. The broker also suspects net debt/operating earnings has peaked in FY20.
Earnings in the second half of FY20 beat UBS estimates as revenue in KFC was stronger and KFC Europe margins were also better than expected. Costs remain under control with chicken prices locked in until 2022. Revenue grew 8.9% in FY20 and net profit 5.1%.
The company's digital delivery strategy continues to progress, currently available in 137 KFC Australia restaurants. While there were disruptions because of the pandemic restrictions in the second half that affected shopping centre and dine-in functions, UBS notes volumes held up reasonably well.
Sizzler reported a -18% decline in revenue in FY20, with three restaurants closed and a significant impact from the pandemic into the end of the year. Six Sizzler stores in China have closed since the balance date.
Delivery continues to provide the tailwind for the company and UBS suspects a focus on value at KFC Australia, with controls on costs, will require minimal price increases. Hence, the valuation remains appealing and the broker retains a Buy rating, with a $10.65 target.
Moreover, there is operating leverage available through store expansion in Australia, Germany and the Netherlands. There is also the opportunity around the rolling out of Taco Bell in Australia. Brokers believe the decision to slow the rolling out of new Taco Bell stores for 12 months is prudent in the current environment, given the significant capital commitment required.
Taco Bell was one of the main areas that underperformed UBS estimates while Wilsons extends assumptions for a maiden profit for Taco Bell by one year, to FY23, reflecting the delayed roll-out.
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