A growing appetite
Shares in Collins Foods (ASX:CKF) have pushed on to record highs since our last review in mid-March, despite an absence of major announcements from the company. The stock has cleared resistance at the $11 mark, and potentially as investors are positioning themselves ahead of the full year results in late June.
We would not be surprised to see these results surprise on the upside, and given strong demand for well-branded QSR offerings in Australia and many other places globally in recent months. This has been evidenced by results across the sector, including a robust quarterly from Yum China, which holds the franchise for both KFC and Taco Bell in China,
Closer to home, strong demand for KFC and Taco Bell was also a feature of the first quarter update from NZX-listed Restaurant Brands. The company has a reasonable footprint in Australia, (with 75 stores) and reported that first quarter sales rose 11.1% to $A54.1 million, due to new store openings late last year and store acquisition activity. Same store sales were up 1.1%, with drive-through store sales continuing to grow strongly. While mall and in-line inner city store sales have yet to recover to pre-COVID-19 levels, this provides a positive read across for Collins Foods in our view.
We believe that Collins continues to have a long runway for growth, both here in Australia and as management continue with the European expansion post Covid. KFC demand has been very strong during the pandemic, amid a significant advertising campaign, and increasing brand awareness. This should set up for a strong set of numbers when full year results are released next month.
We are impressed by the quality of managed at Collins, and as we noted in our last review, the company has however secured a strong hire to help run the KFC business in Australia. Helen Moore has been appointed the COO and comes from a most recent role as CEO of Oporto, which has 180 restaurants across Australia, New Zealand, and Sri Lanka.
We continue to believe that Collins (ASX:CKF) will have a number of operational tailwinds long after Covid is gone.
And in the shorter term, we believe that it is reasonable to expect the strong operational momentum in evidence at the interim results (released last December), will have continued over the past 6 months.
To recap on these results, the KFC business in Australia delivered impressive same store sales growth at the interims of 12.4%. Positive trends had continued into the first 5 weeks of the second half with SSS up 14%.
Delivery is higher margin, and Collins has benefited from expanding the number of restaurants which offer it, to 178, up from 137 at the end of FY20. Delivery is now available from three aggregators – Deliveroo, Menulog and DoorDash. ‘Click and Collect’ is also available.
And there is more growth on the table. The company had plans to build 9 to 12 new KFC Australia restaurants in FY 2021. Collins is also in discussions with Yum! Brands about extending a Development Agreement with a minimum 66 new restaurant builds through to December 2028.
KFC Europe has been more problematic, due to Covid restrictions, but there may be some light here as the economy opens up more, and with vaccines being rolled out. It will be conceivable that sales momentum in Germany has remained positive, and the company’s Netherlands restaurants could well have endured further growth in drive-thru sales.
Collins Foods (ASX:CKF) had been ramping up delivery capabilities (which are not as entrenched as they are in Australia) in the two countries, and at last count was in place at over 63% of the portfolio with aggregators being used. ‘Click and Collect’ has been planned for imminent launch in the Netherlands, and we expect the portion of stores offering delivery will have greatly increased.
Faced with Covid, the company pulled back on near-term expansion plans, but was looking to build up to 3 new restaurants in the second half in the Netherlands. In addition, an agreement has been signed to acquire 3 new restaurants in the Netherlands for €2.5 million. Collins has paid around 4x trailing EBITDA for these restaurants which seems modest, and with scope to lift earnings through some investment. Management see a wider opportunity to expand much further in Netherlands, given what remains a fairly fragmented franchisee landscape.
Germany’s new restaurant build opportunities, under consideration, will likely have remain focused on drive-thru locations which are performing strongly. We still see the bigger story in Europe for Collins as part of a ‘QSR share grab’ by KFC. The Colonel’s offering remains very unsaturated market wise compared to the likes of McDonald’s, Burger King and Domino’s.
Back in Australia there is tremendous growth on offer, in our view, through Taco Bell and the nation’s ever-increasing appetite for Mexican food. The Taco Bell business was impacted more by Covid than KFC, given a greater emphasis on dine-in, but this has been addressed. Sales in free standing restaurants had fully recovered to pre COVID-19 levels the interims. The company now has two aggregators in the form of Menulog and Doordash.
The pandemic impacted the pace of expansion for Taco Bell, but management previously attested to a “strong pipeline” of opportunities for FY22. Around 6 to 8 new restaurant openings are being targeted for this period, with a focus on reaching scale in South-east Queensland and Melbourne within the next 3 to 5 years.
Summary
Collins (ASX:CKF) took the pandemic largely in its stride, but we believe the company will have a number of operational tailwinds long after Covid is under control.
KFC Australia is likely to see a significant earnings uplift in the coming years as SSS remain strong, and with the potential roll-out of another 80 new restaurants. On the other side of Covid there remains significant growth to push the concept in Europe as well as that of Taco Bell back in Australia.
We continue to recommend Collins Foods (ASX:CKF) as a buy for Members without exposure.
Disclosure: Interests associated with Fat Prophets declare a holding in Collins Foods (ASX:CKF) and Yum China.
