Thursday, July 13th, 2017
CKF’s FY17 result, equity raising and acquisitions announced on 26 June were well-received by the market and the shares are up 13% since then after a flat June quarter for the share price. We’re very pleased with our 29% capital return since we initiated the position in September last year.
We are particularly pleased CKF chose an entitlement offer for its latest equity raising and think this probably assisted the rally over the last week. CKF’s FY17 results came in ahead of consensus and expectations across all earnings lines with NPAT beating consensus by ~4% and our own forecast by ~2.5%.
Same-store sales growth was muted at 0.7% for the full year due to weakness in WA volumes but improved to 1.7% in the 2H, closer to our long-term assumption of 2% growth pa. At the end of the FY the same-store sales growth rate was 4%. The improvement in 2H17 was two-fold:
- Conditions in QLD were stronger due to well-received product launches (Tabasco chicken, new burger range, $10 popcorn chicken bucket). WA improved slightly.
- Better cost control through less discounting, tighter use of labour and more selective promotional/in-store marketing.
Same-store sales growth will need to improve further in QLD and WA for the national result to accelerate. A range of outcomes between low and high single digit growth is possible. CKF expects to open 8-9 new stores per year in Australia and 8-10 new stores per year in Europe (Germany and the Netherlands). Work is being done to expand margins through operational discipline and marginal cost cutting.
The dividend payout ratio of around 50% of underlying EPS was maintained and is expected to be unchanged going forward. This is reflected in the 11% D, which is grossed up for franking credits, in the 19% adopted NROE in our valuation.
Sizzler continues to decline, though Sizzler Asia grew solidly despite a major disruption from the death of Thailand’s king and subsequent mourning period. Snag Stand is not improving despite refinement of its offer and marketing. Currently being reviewed, it may be wound down.
Figure 1. CKF FY17 results
CKF will acquire 28 KFC stores from YUM! Brands in WA, SA and Tasmania for $113.4m. The funding is $44.1m from a non-renounceable entitlement offer and $69.3m from new debt. The new stores should increase revenues and EBITDA by at least $93.7m and $15.7m respectively and be mid-single digit EPS-accretive by FY19. The new stores posted same-store sales growth of 5.8% in FY17 and will diversify earnings, giving CKF a footprint in all states and territories. The multiple paid (6.5x EV/EBITDA) is in line with CKF’s historical 6-7x target range for acquisitions.
Figure 2. CKF footprint after acquiring the new stores
The entitlement offer is one new share for every 11 existing shares at $4.55, non-renounceable. The institutional offer had very strong support with take-up of 96%. The retail offer booklet has been despatched and the retail offer closes on 12 July. The StocksInValue model portfolio will take up its entitlements on 12 July. Our current holding of 3,380 shares entitles us to 307 new shares at a cost of $1,397.