Collins Foods: FY22 result was a zinger

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Author name:

By Alexander Mees

Job title:

Head of Research

Date posted:

29 June 2022, 8:30 AM

• Collins Foods (ASX:CKF) achieved 12.6% growth in EBITDA in FY22, 5% higher than expectations. KFC Europe was the standout performer, although KFC Australia also performed well.
• Cost inflation will undoubtedly put pressure on profitability in FY23. We expect a meaningful decline in margins compared with FY22, especially in the first half, despite what we expect will be a resilient top-line performance. We have lowered our operating margin estimates, but higher forecast sales see us increase our EBITDA forecasts by 1% in both FY23 and FY24.
• Despite today’s +12% positive reaction to the FY22 result, the share price is still 30% off its 12-month high of $14.30. We believe our revised estimates take account of the likely cost pressures and, at an EV/EBITDA of 8x FY24F, we believe the current share price offers good value. We believe consumer demand will remain resilient and CKF will exhibit a degree of pricing power to help mitigate inflation in the year ahead. We upgrade to ADD.

Event

FY22 result.

Analysis

KFC drove FY22 outperformance. EBITDA of $209.6m was 5% higher than our forecast ($198.6m) and that of consensus ($200.0m). Operating margins were better than expected in both KFC businesses, although this was partly offset by a softer performance in the start-up Taco Bell brand. 

Cost pressures will lead to margin compression. Higher labour, food and energy costs will weigh on margins in FY23. CKF believes it can mitigate some of the inflationary pressures through successive menu price increases and operating efficiencies, but lower margins seem all but inevitable in the year ahead and especially in the first half.

Consumer demand expected to remain resilient. KFC’s value-based QSR (quick service restaurant) proposition positions it well, in our opinion, in times of consumer anxiety. We believe some consumers will ‘trade down’ to KFC from more expensive QSR options.

It seems likely CKF will increase its focus on promotional offers to drive transactions. We expect positive same store sales growth in FY23.

Forecast and valuation update

We have increased our revenue estimates by 4% in both FY23 and FY24. We have reduced our EBITDA margin forecast by 50 bp in both years. This takes our EBITDA estimate up by 1% to $213m in FY23 and up by 1% to $235m in FY24.

Our DCF and EV/EBIT-based target price declines from (login to view) as a result of lower peer company multiples and a higher discount rate. This implies TSR of 18.5%.

Investment view

We upgrade from HOLD to ADD.

There is no doubt that CKF faces significant cost headwinds in the months ahead. We believe, however, that these headwinds are factored into our earnings estimates and more than factored into the share price.

At 8x FY24F EV/EBITDA, we see CKF as attractively valued for the organic and inorganic growth prospects available to it.

Risks

Margins may fail to improve in 2H23 if cost pressures do not ease and menu price increases are unsuccessful. 

There is a risk to our estimates if Taco Bell loses more money than expected in its start-up phase, or if the brand fails to take off in Australia.

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