Rising ringgit a good sign for Berjaya Food’s margins

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KUCHING: The recent strengthening of the ringgit should have a healthy effect on Berjaya Food Bhd’s (Berjaya Food) margins as the group’s cost of goods sold (COGS) in their Starbucks operations are heavily denominated in US dollar.

In a recent evaluation, the research arm of Hong Leong Investment Bank Bhd (HLIB Research) reported that the total percentage of Starbucks Malaysia’s COGS denominated in the US dollar was around 40 per cent covering coffee beans, frappuccino mix and packaging materials.

The heavy denomination in US dollar is part of Berjaya Food’s previous agreement with Starbucks Corp and has previously affected margins adversely due to volatility of the ringgit against the US dollar.

However, with expectations that the ringgit is set to further strengthen for the next with quarters, Starbucks Malaysia’s margins should also strengthen similarly.

Beyond that, the group’s coffee operations have also continued to be a main contributor the overall earnings as Berjaya Food’s first quarter of financial year 2018 (1QFY18) core net profit (CNP) had risen 6.7 per cent year over year (y-o-y) to RM5.3 million.

“Mainly due to the opening of three new additional Starbucks cafes in 1QFY18, and positive same store sales growth of 2.2 per cent arising from a price hike since January 2017, which have in turn resulted in higher contribution from Starbucks Malaysia operations,” explained the research arm.

And looking forward, the group has also guided that it will intend to continue growing its top-line business with the further expansion of circa 25 new Starbuck outlets per annum.

But in spite of the optimistic outlook of Starbucks Malaysia, HLIB Research points out that the group is still set to incur additional debt from the funding of new café openings which will inflict heavier finance costs to the group going forward.

Currently, Berjaya Food’s net debt stands at RM240.2 million – a significant increase from the recorded RM191.3 million at the end of FY17.

And on the other side of the spectrum, Berjaya Food’s Kenny Roger Roasters (KKR) Malaysia operations has also seen significant improved performance due to the closure of two loss making stores during 1QFY18.

While there are still a portion of loss making KKR Malaysia restaurants, management has guided that they expect to turn them around with promotions offering affordable prices and operational cost streamlining exercises.

Overall, the group’s 1QFY18 results are in line with HLIB Research expectations but have fallen short of consensus results – meeting only 20.5 per cent of consensus full-year estimates.

With that said, HLIB Research is maintaining their ‘Hold’ call on the stock with a lower sum of parts derived target price of RM1.55 from RM1.73 to reflect the group’s new higher net debt.