Starbucks expansion to alleviate BJFood’s cost margin pressure

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KUCHING: Berjaya Food Bhd’s (BJFood) expansion of Starbucks outlets in Malaysia as well as the revision in average selling prices (ASPs) of its beverages are pegged to alleviate the possibility of high cost margin pressure due to weakening consumer spending.

The research arm of AmInvestment Bank Bhd (AmInvestment Bank) noted that BJFood’s Starbucks operations registered a sluggish same store sales growth (SSSG) for the third quarter of its financial year 2017 (3QFY17). This was attributed to softening consumer spending.

“From what we gather, this took place even before ASPs on its beverages were raised in early January by an average of five to 10 per cent.

“Revision in ASPs is expected to alleviate margins from higher input costs but we expect footfall to Starbucks to dwindle in the near term,” it opined in a note on Thursday.

BJFood’s weaker-than-expected 3QFY17 was due to ballooning effective tax rate, sustained losses at Kenny Rogers Roasters (KRR) despite rationalising unprofitable stores, and sluggish Starbucks’ SSSG.

It added, despite KRR Indonesia rationalising six unprofitable stores to lower its store count to 17 stores, write-downs widened losses as earnings contracted by 26 per cent for the quarter year-on-year (y-o-y).

“However, write-downs aside, we expect further store closures and uptrending SSSG to reduce losses heading into FY18,” the research team said.

AmInvestment Bank further pointed out that the company’s effective tax rate ballooned further to 48.7 per cent (compared with 38.4 per cent for the first nine months of FY16).

“Widening losses at subsidiaries, which lack tax credits, gave rise to the deviation in our forecast. The unusually high effective tax rate is due partly to the inability to offset high borrowing costs against non-existent taxable income at the holding company level,” it explained.

In a separate note, the research arm of Hong Leong Investment Bank Bhd (HLIB Research) opined, “We expect BJFood to continue to grow its top-line as it continues to open Starbucks outlets.

“However, with the prevailing weak ringgit and rising commodity prices, we expect the group to continue facing margin pressure in its Starbucks operations.

“Despite this, Starbucks price hike in January 2017 is expected to somewhat mitigate the negative impact.”

Nevertheless, the research team lowered its FY17 to FY19 net profit forecasts of BJFood by 20, 26, and

27 per cent respectively, largely to reflect higher raw material cost, higher loss assumption at KRR Indonesia, and higher effective tax rate as a result of higher loss assumption at overseas operations that could to be offset back home.

“Short-term prospects do not look promising for the group. However, a firmer ringgit and turnaround in KRR Indonesian and Malaysian operations could spell a rerating for the group as top-line is growing as expected,” it explained.