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."

How Soon will AAX Turn Around?

Predicting Better Times

If you read what CEO Azran has to say, you may want to have a re-look at this stock. After all it has  lost almost all its shine off its IPO price of RM1.25 . Currently it is trading at just below 80 sen, for a loss of 45 sen.(36% loss )

Let us look at this latest article on AAX from THE STAR On-line.

"Could it be time to relook at AirAsia X Bhd? This long-haul, low-cost affiliate carrier of the AirAsia Group will be turning around in the second half of the year. Very likely in the third quarter to Sept 30 too.

That’s not all. The viability of AirAsia X flying to favoured destination London appears much stronger than before.

For the better part of this year, the hype and bluster on AirAsia X has died down significantly, following the announcement of two straight quarters of losses.

Long before that, the cancelling of the popular London and Paris routes in 2012 had already cast aspersions on the low cost carrier’s model.

Perhaps flying long haul for a low cost carrier was never viable in the first place.

Not surprisingly, its share price has been heading south, down 16.5 sen to 83 sen on a year to date basis.

It’s also 25.6% or 42 sen down from its initial public offering (IPO) price of RM1.25.

Even during the day the company was floated in July 2013, its share price never performed. The stock finished the day just 2 sen above its IPO price.

Were many already lacking faith for low cost long haul flights at that point?

Over the week, rumours of a merger between Malaysian Airlines Systems Bhd (MAS) and AirAsia X intensfied, as many speculated that a privatisation of MAS would fuel some kind of a tie-up.

On Thursday, Khazanah issued a statement quashing the rumours, saying that the media reports were unfounded and speculative.

Launched in 2007, AirAsia X competes with the likes Singapore Airlines’ Scoot and Qantas Airways’ Jetstar. Its biggest shareholder is the Tune Group with a 17.83% stake while AirAsia Bhd owns a 13.76% stake.

AirAsia X currently serves 19 destinations across Asia, which mainly consist of Japan, Taiwan, China and Australia. It also flies to Jeddah and Kathmandu,raking in a profit in the second half.

During the Farnborough Airshow in London, AirAsia X chief executive officer Azran Osman-Rani confidently said that AirAsia will be turning around in the second half of the year.

Analysts say there is a strong likelihood that this will happen in the upcoming third quarter results.

What’s more, now that AirAsia X has signed a memorandum of understanding (MoU) with Airbus to buy 50 ‘energy efficient’

A330Neos for US$13.8bil with an additional 50 purchase rights, this allows AirAsia X to once again revisit flying to London - the unspoken compulsory route needed for traveller endorsement.

The deliveries will take place between 2018 to 2024.

The key feature of the A330neo is that it is able to save fuel consumption by 14% compared with the normal A330. This makes it the most efficient, medium range wide-body aircraft in the market.

Apart from expanding AirAsia X’s fleet size, the new A330NEO will be used to replace some of its existing aircraft which will be 12 years old by 2020.

On turning around, Azran first explained that the low cost carrier model for long haul flights is viable.

“The losses had nothing to do with an unsustainable business model but was due to the typical start up costs related with setting up a new business,” he says.

“For every new route AirAsia X goes into, there will be an average of a 12-month start up losses incurred. AirAsia X will be turning around because we are reaching the end of that 12 month period for many of our routes,” he explains.

Some may say that AirAsia X is walking on egg shells with its borrowings of RM1.66 bil and cash position of RM75.08mil as of March 31. However, the airline business is a lot more capital intensive than other sectors.

Azran says that when a company starts a new business, it would have to invest in new capacity, stimulate demand and throw in promotions to fill up the flight. All these were typical start up costs invested by AirAsia X in the last two years.

AirAsia X has been expanding aggressively in the last one year.

To its credit, it has carried th most number of passengers to North Asia in 2013. The north Asian markets consist of China, Korea, Japan and Taiwan.

Looking at its first quarter to March 31, 2014, the statistics for the expansion are very telling.

Its average seat kilometre (ASK) which is the number of seats per kilometre, increased 60.12% to to 6.22 million from 3.89 million in the previous period.

Heavy discounting was seen in average passenger fares, which dropped to RM467.11 from RM623.53 previously.

The total number of passengers carried over the three month period increased 66.9% to 1.08 million from 647.366 passengers.

Thus, load factor improved to 85.8% from 84.2% previously.

This resulted in AirAsia X recorded losses of RM11.28mil from a previous profit of RM50.2mil for its first quarter to March 31, 2014. This was on the back of a 40% increase in revenue to RM749.48mil.

The carrier consumed 930,616 barrels of jet fuel for this period, a 72.4% increase from 539,676 consumed previously.

“The increase of AirAsia X’s capacity in its Australian routes as well as capacity expansion by its competitors had led to major losses in the fourth quarter of 2013 and the first quarter of 2014,” says MIDF analyst Chua Boon Kian.

He points that tourist statistics during the first quarter showed a healthy growth trend in arrivals, particularly from South Korea, which registered a 37% year-on-year increase and 19% jump from visitors from Australia.

“If Malaysia Airlines exercises capacity restructuring by the end of FY14, AirAsia X will be able to recoup some of its earlier losses through the recovery of fare yield in the second half of 2014,” he said.

Thus, Chua maintains a “buy” stance on AirAsia X with unchanged target price of 96 sen, premised on an FY15 price earnings ratio of 10 times.

Cheap flights to London again?

AirAsia X had previously flown to Paris and London, offering connections from its Australian routes, but halted serving the routes in 2012.

During the Airshow, AirAsia X co-founder and director Tan Sri Tony Fernandes said that with the orders for the A330NEO,this is a huge sign that it will only be a matter of time before an AirAsia X operates in Japan and India.

With AirAsia X in India, Fernandes added that AirAsia X can then fly to Africa and London, with Bangalore being a big hub.

Meanwhile from Japan, it can start flying to South America.

“Now that we have the A330NEO, it certainly makes London a whole lot more viable. We learnt from our old mistakes. The last time we didn’t have the support and it wasn’t aggressive enough. The rule of thumb is to have 20/30 short haul planes as a feeder, to make the long haul attractive and use it as a base,” says Azran.

Chua says that the longer range capability of A330NEOs will be more fuel-efficient for AirAsia X to resume its European route and the possible opening up of the US west coast route by 2018. “As the Asean region’s income per capita continues to grow, we believed that demand for leisure travel, especially for long haul destinations, should grow simultaneously,” he says.

This year, AirAsia X will take delivery of seven aircraft, hence bringing its fleet size to 23 Airbus A330-300s by the end of this year.

AirAsia X will take delivery of between seven and eight planes yearly.

Azran adds that AirAsia X started operations in Thailand earlier this year. For the first three months, it has already recorded a load factor of 88%. AirAsia X’s Indonesian affiliate will start operations later this year."