Starbucks Sparkles!

Upshot for Coffee!

This article was taken from the On-line STAR.

If you are interested in this counter, read on......

"BY buying out Starbucks Coffee International Inc’s 50% stake in Berjaya Coffee Co Sdn Bhd (BStarbucks) for RM279.5mil, Berjaya Food Bhd (BFood) will be able to have a better control of the cash cow, which may translate into higher dividend payout ahead.

BFood chief executive officer Datuk Francis Lee Kok Chuan tells StarBizWeek in an e-mail reply: “BFood will determine how the cashflow will be utilised instead of having to obtain permission for paying out dividends to BFood from the cash generated in BStarbucks.”

BStarbucks generated cash of close to RM60mil as at financial year ended April 30, 2014 (FY14) and BFood gets to fully decide how to spend the money upon completion of the acquisition, expected in September.

“We have a free hand to run the operations when it is a 50:50 ownership but we cannot simply pay ourselves dividends without getting approval from our partner, Starbucks International. They frown on us for paying out big dividends although cashflow in BStarbucks is very strong,” he adds.

He explains that BStarbucks managed to pay out RM2mil and RM6mil dividends in FY13 and FY14, respectively, and BFood only received half of the amount.

That will change once it owns 100% in BStarbucks.

He says all the dividends it received from BStarbucks were paid out to BFood shareholders as BFood has strong cashflow itself and does not need the monies.

The food and beverage (F&B) group paid out 49% of its earnings in FY13, 58% in FY12 and 42% in FY11.

AmResearch projects higher dividends of 5.3 sen and 6.3 sen in FY15 and FY16 respectively. Notably, dividend yields will be compressed due to the recent spike in its share price.

BFood is also in a better position for other merger and acquisition (M&A) activities due to a stronger cashflow from BStarbucks although it is not looking at other deals currently.

“Any M&As must make sense for BFood shareholders and should be earnings accretive. If a good deal comes along, we will not walk away from it,” Lee says.

Analysts opine that BFood got a sweet deal for buying the 50% stake in BStarbucks at a price-to-earnings (P/E) of 16 times of the latter amidst the booming coffee culture.

On the other hand, Starbucks Corp US is traded at an estimated consensus P/E of 30 times.

AmResearch forecast that BStarbucks will contribute 54% to BFood’s revenue, followed by Kenny Rogers Malaysia at 27%, going forward.

Operating costs unchanged

Operationally, growth plans and investment costs for BStarbucks remain intact.

“There is no change in royalties and franchise fee rates for the next 25 years, which is good for BFood.

“Investment in stores is no different from previously except that now the company is wholly owned by BFood,” Lee says.

New stores, which may come in the form of stand-alone shops and outlets in malls and petrol kiosks, cost RM800,000 to RM1.1mil depending on the size while the investment cost for drive-throughs are higher.

The company plans to open at least 23 to 25 outlets per year over the next five years. It has 173 outlets at present.

Lee does not expect changes in BStarbucks’ operating cost as it has been prudent in cost management.

As for the competition from boutique cafes, he says: “We welcome competition and it is healthy as more people get into the coffee culture.

“We spent a great amount of money in training our partners and I believe this will set us apart from other boutique cafes sprouting all over the country.”

On top of that, BStarbucks has a strong principal that comes up with innovative designs in its stores coupled with great coffee and tea products.

AmResearch points out that the full control in BStarbucks allows BFood to further explore potential business in fast-moving consumer goods and distribution rights in Starbucks products.

As a group, Lee notes that BStarbucks has a better growth potential compared to its other franchise brand, Kenny Rogers Roasters, although profit margins for both businesses are close.

He says it is opening 10 to 12 Kenny Rogers outlets per annum and five to six Jollibean stores per year.

On the industry outlook, he says: “The F&B sector is getting more competitive and we see a slowdown, especially after the last budget announcement.”

He anticipates a knee-jerk reaction from the implementation of goods and services tax (GST) as consumers do not know what to expect but that should normalise over time.

“Starbucks, however, is different and we continue to see strong growth in all our stores. In fact, we are gunning for a world record of having same-store sales growth of double digit in the mid teens over four years,” he elaborates.

Lee expects the streak to continue into the fifth year, which is unheard of in the F&B industry.

He believes that BFood’s store counts growth is sustainlable for at least the next three years.

“With the Government’s Economic Transformation Programme and mass rapid transit sprouting all over, a lot of activities will be created over the next few years.”

On the flip side, a possible growth dampener will be a downhill domestic economy or global economic turmoil.

As for its preparation for the implementation of GST next year, Lee says: “We are starting to talk to our major suppliers and making sure they are GST-compliant too with proper registered GST tax numbers for us to claim our input and output tax.”

Although investors have chased the stock up over 60% in the past two days after the announcement of the BStarbucks stake purchase, some analysts opine that there might be upside in the long term.

“With a full control in BStarbucks, the higher valuation (in BFood) is justified,” a consumer analyst says.

Profits from the fast-growing coffee franchise will be fully consolidated into BFood in FY16 while revenue from BStarbucks will almost triple from the current level.

At current price, the stock is trading at an estimated P/E of 26.76 times for the financial year ending FY15, Bloomberg data shows.

AmResearch has a “buy” recommendation on the stock with a fair value of RM2.50, which is pegged to a P/E multiple of 22 times fully-diluted calendar year 2015 forecast earnings."