It’s Still Finger Lickin’ Good!
Shares in KFC and Taco Bell master franchise Collins Foods (ASX:CKF) soared following strong 1H24 results across all businesses. A quick look at the results and revenues and underlying EBITDA were up I the double-digits with a big jump in same store sales across Australia and Europe that caught the market’s eye. More importantly, it wasn’t just KFC that grew, but Taco Bell also looks to have turned a corner. Clearly the KFC and Taco Bell value meal offering are doing well in an economy where the consumer is struggling and this is now coming through in Europe, Collin’s other key market. That said, we take the opportunity to review the results in today’s report.
But first, a quick look at the technical and Collins Foods has fully inflected and broken out on the topside from a converging triangle range. The correction underway since the ’21 highs above $14 now looks to be over. The primary uptrend which was tested a couple of times, but was never seriously compromised and was consistently respected. Scope is now raised for further upside over the coming year. Collins should at some point retest the record highs, most likely next year.
With that out of the way, we turn our attention to the results:
1H24 Highlights
Starting from the top and Collins Foods 1H24 performance was off toa great start with a 14.3% year-on-year increase in revenue from continuing operations, reaching $696.5 million. We’re pleased to see that management’s strategies from new offerings at reasonable price points to maintaining quality (easier said than done in inflationary periods) were key drivers. More importantly, and as noted above, we saw solid performances in both KFC and Taco Bell.
That said, the operational excellence bundled with the right product development and pricing (good value bundles) resulted in robust growth in both Underlying EBITDA which rose by 16.7% year-on-year to $109.9 million and Underlying NPAT which surged by 28.7% to $31.2 million.
Statutory numbers were also impressive but surged largely on one-off gains from the sale of Sizzler Asia amounting to $20.2 million. That said, Statutory NPAT stood at $50.5 million, with a 40% increase year-on-year.
That aside, net debt was also reduced to $173.0 million, with a net leverage ratio of 1.12.
Source: CKF 1H24 Presentation
On a segment basis, KFC Australia reflected robust growth with sales up 9% to $522.9 million while on a same-store basis, sales grew by 6.6%. Most impressively, despite labour costs and energy prices, margins here improved by 37 bps. We also note resilience in the digital and delivery services which accounted for 28.1% of total sales, showing that even post-COVID, this is still a sizeable source of sales.
Going forward, local operations opened 4 new outlets in the 1H24 with plans to open between 9 and 12 this FY24.
Turning over to KFC Europe, growth here was remarkable with revenue soaring by 36.5% to $148.5 million. The substantial growth here was largely due to the acquisition of 8 stores in the Netherlands but also solid same-store sales growth which was up 8.8% with sales in both Germany and the Netherlands proving resilient. Management also highlighted the strength in digital distribution – we’ll see more of this once Collins Foods rolls out Uber Eats later in the 2H24.
In terms of expansion, management is eyeing to gain more ground in the Netherlands, aiming to open 3 additional restaurants in the 2H24. We do note that this is ultimately worthwhile as the region is beginning to reflect scale benefits with EBITDA Margins surging 146 bps.
Finally, we turn to Taco Bell Australia. Performance here was very impressive showing robust growth with sales up 18.9% to $21.1 million. More importantly, this is the first time in recent history that same-store sales have grown now up 7.9% with product quality improvements, new product launches (Lava Crispy Chicken Burrito) along with collaborations of local brands (Vegemite) have been well received. EBITDA Margins have also surged up 330bps with increasing scale to have paid off and this is despite increased marketing spend.
Management has also resumed expansion having opened an integrated Taco Bell in Underwood, QLD bringing the total network to 27 restaurants.
Summary
1H24 was a great result for Collins Foods with strong financial performance, particularly in both KFC and Taco Bell operations, suggests effective strategic positioning and resilience in a challenging economic climate – we’re not completely out of the woods yet with inflation still lurking. However, management’s focus on steady expansion, revenue growth, and margin improvement will, in our view, contribute to better long-term returns for investors.
We also like that the company has managed to grow in a challenging economic environment, proving that the value offerings have great resilience. This also continues to prove our view that Collins Foods is worth a spot in any portfolio especially as a means for defence.
The recent sale of Sizzler Asia, signs of growth in Taco Bell, and the resilient core KFC business in Australia, alongside a reasonable valuation, underpin our ‘BUY’ rating for Collins Foods (ASX:CKF) for Members without exposure. It will remain firmly held in the Fat Prophets portfolio.
Disclosure: Interests associated with Fat Prophets hold shares in Collins Foods (ASX:CKF).
