KUALA LUMPUR, Jan 7 (Bernama) -- Bursa Malaysia’s benchmark index rebounded from earlier losses to close at its intraday high on Wednesday, gaining 0.27 per cent in late trading as buying interest returned to selected heavyweights. At 5 pm, the FTSE Bursa Malaysia KLCI (FBM KLCI) advanced 4.48 points to 1,676.83 from Tuesday’s close of 1,672.35. The benchmark index opened 0.88 of-a-point lower at 1,671.47 and subsequently hit a low of 1,665.94 during the mid-morning session before gaining momentum toward closing. On the broader market, losers led gainers by 565 to 512, while some 526 counters were unchanged, 1,046 untraded, and 10 suspended. Turnover improved to 2.73 billion units worth RM2.76 billion versus Tuesday’s 2.66 billion units worth RM2.76 billion. Dealers said that investors were cautious following geopolitical developments in Asia.
SELL CALL with unchanged target price (TP) of RM1.55
Comments
- 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.
Risks
- 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.
Forecasts
- Unchanged
Rating
SELL TP: RM1.55
- 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.
Valuation
- 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
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