Collins Foods: Count your chickens - Investor Day 2021

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Senior Analyst
Date posted:
15 October 2021, 8:30 AM
Sectors Covered:
Gaming and Retail

  • In its first investor day since 2017, Collins Food (ASX:CKF) steered clear of anything that might have been construed as a trading update, but instead spent its time enthusiastically communicating a strategy for rapid network expansion in both Australia and the Netherlands.  
  • It was the business in the Netherlands that garnered the most attention from the attendees of the investor day. A week ago, CKF announced that it plans to enter into a Corporate Franchise Agreement with Yum! Brands to take over management of KFC in the Netherlands. A little extra spice was added this morning by the news that CKF has acquired the 11 KFC stores operated by the second largest franchisee in the country, taking its share of the network to c55%. With ambitious store rollout targets written into the  Corporate Franchise Agreement, we expect an acceleration of CKF’s growth in the Netherlands in the year ahead. 
  • We have transitioned our earnings estimates onto an AASB 16 lease accounting basis. On a comparable, pre-AASB 16 basis, our EBITDA estimates rise by 5% in FY22 and 6% in FY23 to take account of the acquisition and the faster rate of store rollout that we now expect in Europe. We make no change to our Hold recommendation, but our target price rises from (login to view).  

Key takeaways and nuggets of information

KFC Australia. CKF sees a significant blue-sky opportunity to roll out more KFC franchises in Australia, despite it being the most heavily penetrated market for the brand in the world. It has a Development Agreement to add at least 55 new stores (an uplift of more than 20%) by 2028. Margins appear to be under control for now, but CKF will look to ‘take price’ next year as inflationary pressures increase. With beef prices at record highs, some of KFC’s burger-focused QSR competitors have introduced or expanded their range of chicken products. CKF is not concerned by this and, given the seemingly inexorable growth in the appetite of Australians for chicken, nor are we.

KFC Europe. It was announced last week that, from the end of CY21, CKF will take over responsibility for running the KFC brand in the Netherlands. It will have control over the marketing strategy (and has added a new Chief Marketing Officer to handle this) and will have the right of first refusal over new sites. It expects to open ‘the majority’ of the 130 new store target set out for the next 10 years in the Corporate Franchise Agreement, but they will be back-end weighted.

Taco Bell. CKF believes the Australian market is now ready to embrace the value-oriented, ‘California Mexican’ concept that is Taco Bell. CKF only operates 17 stores today, but it wants to get to 50 in a hurry and has plans to accelerate the rollout with immediate effect. The new restaurants will be focused in ‘clusters’ in South East Queensland, Perth and Melbourne. Taco Bell is not yet a mature brand in Australia and we believe this makes it more vulnerable to competitive pressures than, for example, the crispy chicken juggernaut that is KFC. Taco Bell isn’t EBIT-profitable for CKF yet and we don’t think it will be for a while. 

The strategy could be a zinger, but what we know is in the price right now

All the messaging of the investor day distilled down to a single word: scale. CKF is very aware that all its brands need to have critical mass in all its territories for it to maximise its profit opportunity. This is why CKF is so enthusiastic about opening new restaurants. It wants to double its KFC footprint in the Netherlands and triple the size of its Taco Bell network in Australia before it will consider itself ‘at scale’. It wants to maintain the rage in KFC Australia too, though with 254 stores already in the ground, we think it needs to balance its organic growth pipeline with the risks around cannibalisation. 

We believe CKF’s quest for scale is the right strategy, but it cannot be scale at all costs. The strategy needs to be well executed to ensure margins are protected and cannibalisation minimised, At a post-AASB 16 FY22F EV/EBITDA of 11x and a P/E of 35x, we believe the growth and risks are reflected in the current share price. We maintain a Hold recommendation, but our increased estimates and higher peer company multiples take our target price up to (login to view).  

Risks

Execution risk around organic store rollout; cost inflation; competitive pressures; variation in royalty rates or terms of agreement with Yum! Brands.  

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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