KFCH STILL ATTRACTIVE

Tuesday July 29, 2008 MYT 11:41:49 AM

KFCH still attractive, cheap valuations

KUALA LUMPUR: KFC Holdings (Malaysia) Bhd (KFCH) remains a buy at RM6.35 and Aseambankers Equity Research says there is more upside for the counter due to the cheap valuations.

In a report issued Tuesday, it said other factors were the potentially better capital management in the second half of 2008, and more remotely, a chance at privatisation.

On the consumption trends in the first half of 2008 (1H08), it estimated KFCH’s 1H08 revenue rose more than 20% year-on-year from the RM808mil in the previous corresponding period.

The increase was underpinned by a by 2%-3% store network expansion and 12% same store sales (SSS) growth at the Malaysian KFCH chain.

“Strong consumption trends were driven by the government’s fiscal measures, innovative new products (Triple XL Burger, Breakfast menu) and effective marketing promotions such as KFC’s 400th store celebration set meals,” it added.

Aseambankers Research said despite the firm earnings momentum anticipated for 2Q08, it was maintaining its 2008 forecasts in anticipation of consumption slowdown and margin erosion.

“We expect SSS to slow to mid single-digit levels in 2H08, as consumers curtail their discretionary spending as inflation chips away disposable income (July’s inflation rate rose to 7.7%).

“We expect gross margins to ease further in 2Q08-3Q08 as an estimated 3% average price hike at the Malaysian KFC restaurants is insufficient to offset rising raw material costs,” it added.

Aseambankers Research said the 1Q08 earnings before interest and taxation (EBIT) margins had eased 0.8 percentage point year-on-year and 1.0 percentage point year-on-year due to rising costs.

In 2Q08, average soybean and corn prices rose 77.6% and 69.5% year-on-year (up 4% and up 22% quarter-on-quarter) to US$13.81 per bushel and US$6.29 per bushel respectively. Current soybean and corn prices were at US$14.1 per bushel and US$5.85 per bushel range.

However, the research house expected KFCH shares to gradually re-rate towards year-end, with QSR Brands Bhd expected to soon thereafter raise its stake in KFCH to over 50% (from under 49%).

It also expected KFCH to raise its net dividend payout from the 50% in 2007. It also did not rule out media reports of KFCH being taken private and merged into QSR.

“We maintain our 12-month target price of RM7.60, based on a 30% discount to its revised net asset value (RNAV) of RM10.80, which implies a target mid-2010 price-to-earnings ratio (PER) of 11.3 times,” it said.

ARTICLES SOURCE: http://biz.thestar.com.my