Upgrade from sell to HOLD recommendation with unchanged target price (TP) of RM1.55
- In-line – 6M17 Net Profit of RM9.2m came in within our expectations but under consensus estimates, accounting for 43% and 34.1% of full year estimates, respectively.
- Interim dividend of 1 sen per share, ex-date 10 Jan 2017.
- Qoq: Net Profit fell 10.5% qoq to RM4.5m mainly due to KRR Malaysia operations incurring losses and weakening Ringgit (which increased Starbuck’s COGS).
- Yoy: Net Profit fell 27.9% yoy for similar reasons.
- Starbucks Malaysia’s operations continues to register growth in sales with higher same store sales growth (SSSG) of 1% qoq as well as contributions from opening of new stores (13 new stores in FY17) Despite this, the group experienced margin pressure due to the weakening of the ringgit as a large portion of their COGS are denominated in USD (Coffee beans, frappucino mix etc.) (USD MYR average of 6M16:3.90 vs 6M17:4.05)
- KRR Malaysia was in the red for 2Q17. The group attributed this mainly to the current low consumer sentiment as well as the closure of 2 stores ytd, which incurred significant right offs.
- The group continues to close its unprofitable KRR restaurants in Indonesia, closing 3 shut downs in FY17 to date.
- We anticipate the group to continue to experience margin pressure due to the current weak ringgit as Starbucks (~40% of Starbuck’s COGS are denominated in USD) accounts for the bulk of the group’s earnings.
- 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.
- Starbucks Malaysia’s top line is growing as anticipated. However, the weak MYR against the USD has depressed margins and will continue to do so until a significant change in exchange rate happens. We keep estimates unchanged despite the recent weakening of the Ringgit as we have already priced in thinner margins for FY17.
- TP is unchanged at RM1.55 but our call is upgraded from a Sell to a HOLD due to the recent fall in share price. TP is derived from 20.5x PE of FY18 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.