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Collins Foods Hits Margin Wall

Small Caps | Dec 01 2022

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

Collins Foods has not surprised with its half year result, but updated guidance suggests anticipated second half margin recovery is no longer expected. 

-Results differ region to region for Collins Foods’ first half
-European margins suffering from impacts of elevated labour and energy costs
-Implemented price increases aim to offset pressures, with further increases being carefully considered
-Previously anticipated second half margin recovery looks unlikely to emerge  

By Danielle Austin

While Collins Foods’ ((CKF)) first half results demonstrate strong ongoing demand in its Australia, Germany and Netherlands businesses, costs in Europe continue to challenge the company. 

The company reported revenue growth of 15.0% across all divisions. By division, KFC Australia increased 10.6% on the previous comparable period underpinned by same store sales growth of 5.1%, while KFC Europe rose 31.9% underpinned by same store sales growth of 10.4%. Performance from Germany and the Netherlands bolstered the result, with the regions delivering same store sales growth of 14.6% and 9.2% over the half respectively. 

However margins in Europe have been heavily impacted by cost pressures amid elevated wages, energy and commodity pricing. These same pressures are largely expected to impact over the coming year, with the company guiding to a group margin decline of -2-3 percentage points over FY23, remaining flat in FY24. 

In the days since the release of the result, Collins Foods’ share price has taken a tumble. While analysts have largely found the composition of the company’s result as expected, commentary suggesting margin recovery over the coming half was more surprising, and, Morgans (Add, target price $9.50) believes, the reason for the share price decline. 

The company had previously guided that margin recovery would emerge in the second half, but a reduction in full year guidance suggests Collins Foods is now not anticipating a near-term rebound. The company now guides to margins for KFC Australia of 15-16%, down from 16-17%, and for KFC Europe to decline -2-3 percentage points, from a previous -1-2 percentage points. 

Better cost environment would improve outlook

Alongside Morgans, both UBS and Macquarie cover Collins Foods. While both Morgans and Macquarie are equivalent Buy-rated, UBS has opted for an equivalent Hold rating. Between them these brokers have an average target price of $8.73, with a range of $8.20 to $9.50.

Material price increases were implemented for KFC Netherlands during November, noted UBS (Neutral, target price $8.50), and for KFC Australia in September. The broker assumes the Australian business will likely require an additional price increase in December or January to offset the impact of ongoing chicken pricing renegotiations. 

UBS remains constructive on Collins Foods’ longer-term story, and sees potential for the cost environment to improve over FY24. The broker would like to see signs of abating cost pressures or stronger price increases to support a more positive outlook. 

Macquarie (Outperform, target price $8.20) expects cost pressures will remain a headwind for Collins Foods in the near to medium term, but also anticipates consumer spending is likely to slow as the impact of rising rates hits households. 

Outside of the FNArena database, Wilsons (Overweight, target price $11.49) similarly noted margin contraction was ahead of expectations, and that the revised margin guidance suggests a deeper and longer impact from cost inflation than had been previously anticipated. 

Similar sentiments were made by Canaccord Genuity (Hold, target price $7.50) and Jarden (Neutral target price $8.50). The former highlighted the company remains committed to putting the customer first, and this value proposition continues to weigh on margins. 

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