Australia | Oct 11 2021
This story features COLLINS FOODS LIMITED. For more info SHARE ANALYSIS: CKF
Analysts have given the thumbs up to Collins Foods ((CKF)) deal with Yum! to become KFC’s corporate franchisee in the Netherlands
-Collins gains greater scale and control
-Brokers spy potential for penetration
-Australian business (the bread and butter) is bubbling along nicely
By Sarah Mills
Analysts have given the thumbs up to Collins Foods' ((CFK)) deal with Yum! to become KFC’s corporate franchisee in the Netherlands.
Brokers couldn’t comment on the materiality of the deal, given the numbers have yet to be disclosed, but view it as a strategic win and a vote of confidence from Yum!
The deal supersedes the existing Netherlands Development Agreement and hands greater scale and control to Collins – critical elements in driving profits through a quick service restaurant.
Collins Foods also gains greater control over the brand.
Under the Corporate Franchise Agreement, Collins will “develop, manage, market, support and operate the KFC business in the Netherlands, including the introduction, management and oversight of existing and future franchisees.”
The company will roll out up to 130 new KFC stores this decade, taking the total to 164 – four times its existing size. That’s a lot of chicken, assuming they can convince the Dutch to eat it.
The new stores will comprise both franchised and corporate restaurants.
The company will receive a fee from KFC towards the costs of running the business in the Netherlands and earn performance-based incentives.
The agreement excludes royalties.
Collins Foods will acquire all assets, contracts and employees of KFC.
The deal carries a five-year term with an option to extend another five years, starting December 31, 2021, pending contractual delivery.
Jarden, not one of the seven brokers monitored in the FNArena database, expects Collins Foods will take the opportunity to strengthen its corporate oversight and will at the very least aim to maintain corporate restaurant numbers at the existing level of 44% of new stores, if not higher.
Macquarie describes KFC Netherlands as fertile ground and expects a post-covid recovery in same-store sales.
The broker estimates that the acceleration of store rollout targets implies growth of roughly 5x in the store footprint over the decade.
Macquarie’s store penetration analysis suggest that Collins Foods' targets are achievable given the relatively low market penetration of KFC in the Netherlands, compared with Australia, Canada, the USA, and Asian emerging countries such as Thailand and Malaysia.
KFC stores per 1m people in Europe are about one-tenth the penetration rate of Australia, and the broker notes the Netherlands would still be under-penetrated after the rollout, with 12 stores per million versus Australia’s 27 stores per million, although Australians and Americans eat more chicken.
Most brokers recognise the risks surrounding the differing eating habits of Europeans.
Macquarie says the Netherlands ramp-up, combined with the consistent rollout of new stores in KFC Australia, supports double-digit EPS growth over the medium term and justifies a premium above the historic average and the broader market.
The broker reports the quick service restaurant industry in the Netherlands has grown at a compound average growth rate of roughly 6% over the past five years (pre-pandemic) and expects mid-single-digit growth, pending consumer attitudes to convenience food and nutritional content.
Jarden admires the improved earnings profile.
“This agreement moves Collins up the value chain with the KFC network and should go a long way to increasing confidence in the European strategy,” says Jarden.
The broker views Collins Foods as an attractive proposition, underpinned by a leading global brand and well-run restaurant network, delivering both defensive and growth characteristics.
Jarden also admires the scale and predictability of the Australian KFC operations, and spies incremental upside from the digital/delivery rollout.
Europe’s prognosis is less certain, given cultural biases against fast foods; and a “slow” restaurant economy underpinned by tourism, but strong execution in Europe would prove the icing on the cake.
Cannacord Genuity, also not one of the seven, says Collins’ increased control should enable it to improve financial returns from the region and it too expects store consolidation under corporate management.
The broker’s investment thesis relies on an accelerated rollout of domestic stores, and new product development that resonates with new consumer preferences.
Wilsons, also not one, likes the “innovative franchise model” whereby Collins Foods receives a fee from KFC towards their costs of running the market while also earning incentives through meeting objectives linked to development and other KPIs.
UBS describes the agreement as a strategic win for Collins Foods.
“Economically, this agreement is below the threshold of materiality and cannot be estimated due to the variable nature of the incentives model,” notes the broker.
But “we view this agreement as a positive from a strategic perspective, giving Collins more control around its future path in the Netherlands”.
Brokers précis their estimates on the usual catalysts.
Upside risks include an acceleration of store rollouts, reduced competition as traditional on-premise operators bow out, and potential M&A given Collins’ strong balance sheet.
Downside risks include the usual covid resurgence caveats; supply chain and input cost pressures; execution risk, changing consumer preferences, the Yum! relationship, and a disruption in store rollout momentum.
About the only point of disagreement is whether the figures justify a Buy rating or Neutral (or their equivalents).
Macquarie believes Collins 10% premium to the ASX200 Small Ords Index is justified given double-digit earnings forecasts over the medium term, and flags a Buy rating.
UBS forecasts a strong recovery from covid over the next year or two, but says the 14% compound average growth rate of 14% is already priced into the 26x earnings multiple and remains Neutral.
Commsec notes Collins’ technical indicators look supportive.
Jarden (Buy) has a target price of $13.31; Wilson (Overweight) $13.15 and Cannacord (Buy) $13.35.
The database has one Buy rating (Macquarie) and two Hold, with a consensus target price of $12.72, in the wake of the share price response, suggests -5.1% downside.
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