Collins Foods Has Tough Comparables To Cycle

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

After a strong performance over FY21, Collins Foods will be heavily dependent on delivery and digital roll-out for growth in the KFC brand over the year ahead

-Incremental upside from home delivery and digital orders
-Collins Foods has both defensive and growth characteristics
-Positive outlook for KFC Europe as restrictions ease
 

By Eva Brocklehurst

A softening of the outlook for Collins Foods ((CKF)) in Australia is likely due to elevated comparables, while the opposite is anticipated for the company's KFC brand in Europe.

As Morgans explains, KFC Australia enjoyed two years of growth in one in FY21 and therefore FY22 is likely to be more modest. The company may find it difficult to outperform over the balance of 2021.

Sales momentum was strong in the second half and margins were firm for KFC Australia. Underlying operating earnings in FY21 of $136.3m were up 12.4%. KFC Australia revenue was up 13.8% while KFC Europe revenue was relatively flat.

Taco Bell revenue growth was 57.4% to $28m and earnings roughly broke even. There are 16 restaurants now trading and the company is targeting a further 9-12 in FY22, including the opening of a store in Perth later this year.

Jarden assesses Collins Foods is an attractive business that has a leading global brand and a well-run network, providing both defensive and growth characteristics. Moreover, the broker likes the scale of the Australian KFC operations and the predictable outlook, with incremental upside from the rolling out of both digital orders and home delivery.

Digital sales now account for 14% while delivery is available at at 202 stores out of the network of 251. Therefore, the incremental uplift from the penetration of home delivery for KFC Australia will be important going forward, Morgans suggests.

While the company expects stable margins, the broker suspects this will be difficult to achieve should growth persist around current levels and downgrades to Hold from Add.

Canaccord Genuity believes KFC Australia performance has benefited from brand recognition, marketing choices and operating efficiency but agrees the challenge will be in cycling this performance.

The broker suspects the company will rely on aggressive promotional activity to retain market share and this may mean margins ease back a little. Still, there should be a benefit from rolling out more stores.

The broker notes the balance sheet has scope for acquisition of smaller franchisees in Europe and likes the overweight exposure in Western Australia and Queensland, retaining a Buy rating with a $13.35 target.

Australia

Same-store sales growth in the first seven weeks of FY22 was 1.5% for KFC Australia while Taco Bell was affected by the Melbourne lockdown and posted a contraction of -14%.

Morgans was disappointed by the latter outcome when considering the comparable sales period was also affected by the pandemic. Wilsons, on the other hand, notes the exceptional trading performance of KFC Australia, amid effective brand engagement, and believes this business alone means Collins Foods deserves a premium valuation.

The broker, while retaining an Overweight rating and $13.15 target, agrees improvement in same-store sales growth and margin expansion are critical to enable sustained growth in the store network and concedes execution to date has been somewhat mixed for Taco Bell and KFC Europe.

Canaccord Genuity believes comparable store sales for Taco Bell reflect weaker brand strength as this concept is new in Australia. Still, the broker points out margins are on an upward trajectory and the marketing strategy for both Victoria and Queensland will focus on suburban clusters to improve awareness.

Europe

Same store sales growth in the first seven weeks of FY22 was 21.3% for KFC Europe, as restrictions eased. In FY21 The Netherlands same-store sales contracted -3.3%, reflecting a higher proportion of city centre stores while Germany rose 4.2%, with delivery now available across 28 of the 46 KFC restaurants.

The company has acquired a net eight stores in the Netherlands through three franchisees for EUR10.9m with pre-pandemic earnings of EUR1.9m. Canaccord assesses the European network was affected by exposures to CBD and tourist locations amid a prolonged period of restrictions on seated dining. Nevertheless, the start of FY22 has revealed a much stronger post-lockdown recovery.

Sales growth may have been modest in FY21 but was well ahead of Jarden's expectations. The broker notes the solid start to FY22 in Europe, highlighting the delivery option is also performing well there, and retains a Buy rating with a $13.31 target.

UBS, which places its Buy rating and $11.65 target under review, flags costs in Europe that were negatively impacted by the pandemic, although accepts the acquisitions provide a platform for stronger growth.

Morgans acknowledges European sales were robust, considering the sweeping lockdowns over most of the trading period, and points out most of the impact was experienced in the Netherlands where the operating earnings margin contracted materially.

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