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Friday, October 14, 2016

Brokers Report: Berjaya Food - Weak ringgit plagues Starbucks

SELL CALL with unchanged target price (TP) of RM1.55


  • As anticipated, revenue of BFood’s Starbucks Malaysia operations is growing steadily. However, Starbucks’ EBIT margin has been depressed due to the weakening of the MYR against the USD. This is due to BFood purchasing certain raw materials from Starbucks Corp (USA) such as coffee beans, frappuccino mix and syrup which are denominated in USD. These materials account for between 40-50% of Starbucks Malaysia’s COGS. Therefore, given the recent renewed MYR weakness to ~RM4.20/US$, Starbucks Malaysia’s margins will remain depressed. This effect is illustrated over the previous six quarters (Figure 1).
  • In FY17, BFood has closed one unprofitable KRR Indonesia restaurant and plans to continue to close loss-making outlets. Further closures of will reduce BFood’s effective tax rate as currently losses overseas cannot be offset back home in Malaysia, resulting in an inflated effective tax rate.
  • Ready to Drink (RTD) Starbucks coffee beverages have been rolled out and are available at various supermarkets and retail convenient stores at RM12 each. Starbucks is offering a voucher that entitles the holder to a free coffee with every purchase of RTD coffee to encourage sales. Selling of RTD beverages is expected to be loss making initially as BFood struggles with weak ringgit as the product is imported from USA.


  • Nandos superior brand name to KRR Malaysia threatens to take away more market share from a business unit that is already experiencing negative SSSG.
  • Further Ringgit depreciation against USD.


  • Unchanged


  • Starbucks Malaysia’s top line is growing as anticipated. However, the weak MYR against the USD has depressed margins and will continue to be so until a significant change in USD/MYR exchange rate. We keep estimates unchanged despite the recent weakening of the Ringgit as we have already priced in thinner margins for FY17.
  • KRR Indonesia operations are still loss making and time is required to close unprofitable stores.


  • TP is unchanged at RM1.55 but our call is downgraded from a Hold to aSell due to the recent rise in share price. Target price is derived from 25x PE of FY17 EPS.
  • Two factors could trigger rerating; 1) significant MYR appreciating against the USD which would reverse margin erosion of Starbucks Malaysia and 2) speedier turnaround/closure of loss-making KRR outlets in Indonesia.

Source: Hong Leong Investment Bank Research - 14 October 2016

Thursday, October 13, 2016

Brokers Report: N2N Connect Berhad - Synergistic Boost

Retain outperform recommendation with target price (TP) of RM1.08

The Group announced overnight that it has entered into a sales and purchase agreement with Reuters International Holding S.A.R.L. and Systex Capital Group Inc. for the acquisition of the entire equity interest in AFE Solutions Limited (AFE) for an initial purchase consideration of USD20.6m (RM85.3m), to be paid in sh. We are positive on the acquisition, and see the transaction as a value accretive and synergistic one, enabling the Group to fast track its regional expansion plans. We make no changes to our earnings estimates at this juncture until more milestones with regard to the conditions precedent are met (completion expected 1Q2017), though we would like to highlight a potential 30%-40% jump in forward earnings based on an average RM6.5m consolidation of AFE’s numbers. Our Outperform call is reaffirmed with a PE derived target price of RM1.08 premised on a 30x multiple to FY17 earnings per share of 3.60sen, the higher multiple justifiable in our view given the strong growth anticipated.
  • More on AFE. Incorporated in Hong Kong, the company is a financial data and trading solutions provider with presence in Hong Kong, Macau and Vietnam. Its group of companies offer customers, amongst which are stock brokerage firms, commercial banks, asset management companies and retail investors, a full suite of multi market and multi-instrument platforms for information, stock trading and settlement services. Though the AFE Group reported a RM714,000 loss for FY15, this comes as a result of equity-accounting a Thai associate’s RM7.47m share of losses, an entity which has been earmarked for disposal upon completion of the transaction, hence the absence of this drag going forward. Historical track record has been encouraging otherwise, a net profit of RM7.4m recorded in FY13, RM3.9m in FY14, RM6.7m (adjusted for the associate losses) in FY15 and RM2.4m up to May 2016.
  • Acquisition price based on an implied 8.5x price-earnings multiple is fair in our view, arrived at on the basis of AFE’s consolidated FY15 net profit of RM6.76m (adjusting for the associate’s share of losses), and cash holdings of about RM27.95m amongst others. With AFE, N2N is able to leverage on the former’s expertise in information solutions as well as its overseas customer base to complement its existing business and expand into new markets. Add to that the partnership with its 2 significant shareholders, primed to bear fruit through the development and rolling out of QUICK PRO in Japan and across Asia, the company’s growth potential is exciting. While the Group’s previously-healthy sh pile (c. RM112.5m as at 30 June 2016) will be markedly reduced, the company is still able to finance other value-enhancing M&A activities should any arise.

Source: PublicInvest Research - 13 Oct 2016