Delivering on various fronts
Shares in Collins Foods (ASX:CKF) have recently pushed on to record highs, despite an absence of major announcements from the company, but as investors positioned ahead of FY21 results. The shares have traded softer in the wake of the results today, but are probably more reflective of the run up in the stock this year, rather than any disappointment over the release per se.
The FY21 numbers were strong in our view, with Collins delivering a record result, with impressive same-store sales growth at KFC Australia, a solid performance from Taco Bell, and an improving picture continuing to emerge in the Netherlands and Germany as restrictions are relaxed in Europe. Astute acquisitions have added to the mix, and roll-out plans in both Hemispheres are likely to drive earnings growth in the years ahead in our view.
Collins (ASX:CKF) reported that revenues for the 12 months ended 2nd May 2021 rose some 12.4% to $1.07 billion. Underlying earnings from continuing operations rose by the same percentage to $136.3 million, with robust net operating cash flows of $95.9 million allowing the company to pay down debt, and declare a full franked dividend of 23 cents per share, up 15% on a year ago.
Source: Investor presentation
KFC Australia was the standout performer, with revenues jumping some 13.8% to $900.4 million. Same store sales growth was an impressive (and record) 12.9%, while margins rose more than a percentage point to 17.9%. Collins Foods has continued to flourish throughout various outbreaks in Australia, with consumers turned to trusted brands, and seeking convenience. Strong marketing, and an expansion of digital and delivering capabilities have certainly boosted the cause. Underlying earnings rose 21.6% to $161.4 million, while margins gained 1.1% to 17.9%.
KFC Australia
Source: Investor presentation
A digital push has certainly been a big part of Collins success. E-commerce sales channels now account for more than 14% of total sales. A total of 202 restaurants now offer delivery with three aggregators and management are trialling Delivery-as-a-Service (DaaS) in-house delivery platform.
Management accelerated the restaurant rollout in Australia, opening 11 new restaurants during the year. In addition, 17 major remodels and 25 minor upgrades were completed. External digital menu boards now feature in a third of drive-thru restaurants and kiosks are currently being trialled in an initial 13 restaurants.
A strong store rollout plan has been targeted for FY22, with the company looking to build a total of 9-12 new restaurants. A new development agreement will see Collins build a minimum of 66 new restaurants by 2028. By the looks of recent same store sales numbers, there should be plenty of appetite for this expansion. Digital menu board installations will cover all restaurants within 3 years, the rollout of a ‘kiosk’ format (30-50 locations) should further support margin growth in our view.
KFC Europe faced a more challenging operating environment amidst the pandemic, with margins impacted by ongoing lockdowns and dining restrictions, in place for most of the year. SSS declined 0.6% (an improvement on the 5.8% decline in FY20) and EBITDA margins contracted to 0.8% (versus a 5.1% squeeze in FY20).
The fact that the KFC business in Europe is more weighted to in-line and food court locations than in Australia was a headwind. Revenues however increased slightly, by 0.6% to $134.9 million. Same store sales declined by 0.6%, with Netherlands (-3.3%) a drag due mainly to a higher in-line and CBD restaurant mix, including the flagship Amsterdam restaurant in Damrak. More encouragingly, Germany achieved positive same store sales growth of 4.2%. Both regions performed strongly at drive-thru locations, with Netherlands’ same store sales up 9.5%, and Germany up 12.6%. Overall earnings margins in Europe declined 4.3% to 0.8%.
KFC Europe
Source: Investor presentation
The performance in drive-thru in Europe was heartening, and this is a format that the company wants to target, given the uncertainty over the timeline for a wider reopening, the potential for further outbreaks, and the recovery in tourist foot traffic. The company has moderated expansion plans, but this can be scaled back up.
Collins (ASX:CKF) opened three new restaurants in the Netherlands during the year. A Development Agreement signed with Yum has build targets of 2-4 per year to 2025, with a similar number pegged for FY22. The company has added a net 8 restaurants through the recent acquisition of 3 franchisees for a total of €10.8 million – this looks like a reasonable deal, with an effective PE of just over 5 times. Geographical presence has been extended, and Collins will have 44% market share in the Netherlands post completion. Management continue to target further expansion opportunities.
KFC Netherlands
Source: Investor presentation
Management say that they are taking a more ‘selective’ approach to the deployment of capital in Germany in the near term. We believe that the long term opportunity for expansion into such an underpenetrated market (KFC relative to other QSR’s) remains immense.
Back in Australia, Taco Bell put in a strong effort as well during the year, with revenues up 57.4% to $28.0 million and store level EBITDA coming in at $1.4 million, versus $0.6 million in 2020. Same store sales growth was 3.9%.
After a pandemic pause in the first half, the company opened four new stores in the second half, with plans to ramp up the build rate. The company expects to open 9-12 new restaurants in FY22, and as it looks for Taco Bell to gain scale within 3-5 years. We continue to see Taco Bell as a material long term earnings driver, as Collins leverages a great brand and an ever-increasing appetite for Mexican food. Delivery now accounts for 15% of sales and is growing with the use of aggregators.
Collins (ASX:CKF) has exited the Sizzler brand in Australia, but the business in Asia remains profitable, despite Covid, with EBITDA of $1.6 million and EBIT of $0.8 million. Revenue declined 46.8% to $2.5 million due to the significant restrictions on Food service in Thailand and Japan.
Overall a strong earnings and cash flow performance flowed through to the balance sheet, with net debt falling from $203.2 million in FY20 to $177.4 million. The Net Leverage Ratio fell to 1.33 from 1.69, and Collins has ample financial flexibility to scale up its rollout program, or take advantage of opportunistic acquisitions as they present themselves.
Source: Investor presentation
Overall, we were very encouraged by the record full year numbers. Same-store sales growth at KFC Australia is robust, while there was a solid performance from Taco Bell, and an improving picture continues to emerge in the Netherlands and Germany as restrictions are relaxed in Europe. Astute acquisitions have added to the mix, and roll-out plans in both Hemispheres are likely to drive earnings growth in the years ahead in our view.
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).
