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KFC Australia Underpins Collins Foods

Australia | Dec 02 2020

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

As Collins Foods embarks on its second half and rolls out more Taco Bell stores, KFC Australia is securing strong sales growth

-KFC Australia to maintain improved margins
-Taco Bell roll-out targets reiterated
-Strong pipeline of promotions

 

By Eva Brocklehurst

The established strength of KFC Australia came to the rescue of Collins Foods ((CKF)) in the first half as takeaway and home delivery secured its niche during the pandemic. Strong same-store sales growth has also been maintained over the first five weeks of the second half while KFC Europe has been affected by the second wave of lockdowns.

Canaccord Genuity asserts the relaunch of Kentucky Fried Chicken as a brand device has evoked nostalgia in the time of coronavirus and was a timely promotional step. Collins Foods is confident KFC Australia can sustain positive same-store sales growth and improved margins.

After temporarily pausing the Taco Bell roll-out, management has stated there is good progress on enhancing profitability. Roll-out targets were reiterated and Taco Bell is expected to re-accelerate from FY22. Taco Bell sales per store are reportedly back at pre-pandemic levels and the company is working to optimise the economics.

Sizzler, Taco Bell and KFC Europe were marginally below Morgans' estimates in the first half although this was more than countered by the KFC Australia being ahead. The broker believes KFC Australia earnings can grow incrementally into FY22 and profitability in Sizzler and Taco Bell should improve.

Net profit was $27.5m in the first half and Australian operating earnings growth was 22%. KFC Australia reported record 12.4% growth in same-store sales while KFC Europe slumped -4.2%. Collins Foods has acquired a small Dutch KFC portfolio consisting of three outlets, expected to contribute $800,000 in operating earnings per annum from FY22.

Europe

The company continues to acquire and roll out new European stores to improve the network mix and, if earnings can bounce back in FY22, this should help mitigate comparables domestically, Canaccord Genuity believes.

The broker notes the Netherlands suffered during the first half because of its CBD/in-line restaurant mix while Germany has had lighter restrictions and its dialled-in menu offerings are better. Still, drive-through is performing well in both countries even though trading restrictions remain.

UBS believes Europe should be a big beneficiary of a post-pandemic recovery and portfolio expansion is likely to contribute around 20% to FY22-25 earnings growth, even if store roll-out slows for the short term.

Wilsons is encouraged by the increasing penetration of drive-through which, along with a value-driven menu and marketing, should benefit underlying sales growth. There are also acquisition opportunities that can accelerate scale benefits.

The broker highlights same-store sales growth for those stores with drive-through options was 7.9% and 4.4% in Germany and The Netherlands, respectively, showing how consumers have stepped up to “covid-safe sales channels”.

Promotional Activity

Morgans was most interested in the commentary regarding the cycling of above-average trends in FY22, as the company emphasised its strong pipeline of products and promotions.

Moreover, management believes the margin on operating earnings of more than 17% is sustainable and Canaccord Genuity suspects record margins could persist into the second half.

This may create a challenge when cycling the following year but there has been a step change in the use of delivery aggregators and the company will rely on aggressive promotional activity to embed these habits with consumers.

UBS considers Collins Foods a strong performer offering a three-year compound growth rate for earnings per share of 10% and has a Buy rating and $11.65 target. Morgans notes the material discount to peers, maintaining an Add rating and $11.39 target.

Wilsons has an Overweight rating and $11.62 target and finds the valuation compelling, emphasising the "exceptional" trading performance in KFC Australia. Canaccord Genuity has a Buy rating and $11.10 target.

See also, KFC Delivery A Winner For Collins Foods on July 1, 2020.

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