A ‘not so secret’ recipe for success
It has been fairly quiet on the news front since our last update on Collins Foods (ASX:CKF). Today, Australia’s largest KFC operator released full year results, which saw earnings leap 16% on a 21% jump in revenues, fuelled by acquisitions. We attended the investor presentation and were encouraged by the result, current trading, and future growth plans in Australia as well as Europe. After digesting the release the market has also agreed, with the shares lifting in a down market, and after initial selling after the announcement.
We remain encouraged by the growth story for Collins, but at home, but also particularly abroad. With margin boosting store modernisations underway, and much lower levels of penetration for KFC in Europe versus other quick service offerings, we believe the outlook for further gains in shareholder value is robust.
With the stock trading on around 15 times FY19 earnings and with a forecast 3.4% yield, we retain a buy recommendation on Collins for Members without exposure.
Full year results
Announcements have been thin on the ground since our last update on Collins Foods (ASX:CKF), but not so has the company’s operational progress. The last year has seen acquisitions completed both at home and abroad, boosting the footprint, and with it the top and bottom lines. Management have also demonstrated further success at lifting margins through store modernisations.
For the year ended 29 April 2018 revenues rose 21.7% to $770.9 million, with organic growth boosted by acquisitions. During the period the company acquired 25 restaurants in Australia, along with 15 in Germany, and 18 in the Netherlands.
Source: Collins Foods (ASX:CKF) Company Presentation
At the bottom line statutory EBITDA (earnings before interest tax and depreciation) rose 14.7%, and was 16.4% ahead at $94.5 million on an underlying basis.
Underlying NPAT (net profit after tax) rose 13.3% to $38.9 million while operating cash flows were 23.1% higher at $74.5 million. Management held the full year dividend at 17 cents per share while it waits for the earnings from acquisitions to flow through to results in a more meaningful fashion.
Source: Collins Foods (ASX:CKF) Company Presentation
The company’s performance in Australia over the years has been consistently robust, and this continued into FY18. Top line revenues grew 13.6% while same store sales rose 1%. This should improve further with the business in Western Australia seeing growth after management attention and store modernisations.
Source: Collins Foods (ASX:CKF) Company Presentation
During the year the company completed (bar one) the acquisition of 28 restaurants from Yum! The integration is said to be progressing well. In addition to acquired stores the company built and opened 5 new restaurants. Underperformers also were attended to, with 3 closed during the year.
On the conference call management believe that the company can comfortably add 8-9 restaurants each year, with growth opportunities in Tasmania and South Australia in particular. While the market in Australia is semi-mature, there are also regional pockets which are not saturated yet, and will provide further growth.
Earnings wise, EBITDA from the Australian stores rose 10.5% to $99.3 million. EBITDA margins dipped slightly to 15.9% from 16.4% in FY17 due to promotional activity. The company is also now seeing over 20,000 orders a week to its App. Home delivery capabilities are also being scaled up in the year ahead.
Source: Collins Foods (ASX:CKF) Company Presentation
The ongoing refurbishment program should lift also help lift margins going forward.
During the year there were 12 major remodels and 17 minor remodels, which together with the five new builds made for FY18 capex of $22 million.
In Australia, the company also has a longer term angle for growth, with the launch of the Taco Bell offering. The first restaurant was opened at Annerley in Brisbane and has performed strongly. Further openings are planned before the end of the calendar year. This was the first Taco Bell to be opened in Australia for more than a decade, and management are looking to ride the much greater acceptance and taste for Mexican food that has occurred over that time.
Sizzler though continues to go out of fashion, with another two closures, and now there is just 13 sites in Australia. Earnings though for the unit came in flat at $4.6 million, with strong growth in the Asian operations providing a helpful offset. Royalty revenues there are up 9.7% with 5 new restaurants opened in Thailand and a total of 73 in Asia at year end.
The bigger growth story from our perspective though resides in Europe where the company now has a total of 33 restaurants following the acquisitions last year. Management are applying their own “not so secret” recipe to lift margins at the acquired stores and this is already meeting with success. The company has already seen an improvement in the results in Germany, while the Netherlands is performing to expectations (albeit with some initial margin softening due to ‘opening’ promotions). Overall, pro-forma same store sales were ahead 1.4%.
Source: Collins Foods (ASX:CKF) Company Presentation
The company now has a foot in the door in Europe, and will use this as a base for expansion, albeit at an astute pace. Collins has already built and opened two new restaurants in the Netherlands and two new restaurants in Germany (and two post year-end). Management are targeting 6-8 new openings across Germany and the Netherlands in FY19. The company is also continuing with a remodelling program at 7 locations.
Source: Collins Foods (ASX:CKF) Company Presentation
Whilst some have questioned the impact of Collins’ overseas ambitions on balance sheet strength, the reality is it is coping quite well. Net debt has increased $94.1 million to $227.2 million, but the leverage ratio of 2.14 times is well below maximum covenant levels of 2.75. With the heavy lifting out of the way acquisition wise, debt levels should fall from this point.
Source: Company Presentation
Turning to the charts, and with reference to the daily chart, support at the October 2017 low of $5.40 has been broken since our last review, but has recently been reclaimed. Prices are now flirting with initial dynamic support at the 200-day moving average (green line) of $5.51. In the grand scheme of things, we would favour an eventual upside break above resistance sighted at the psychological $6.00 level (horizontal dashed-red line) once this corrective phase of the technical cycle completes. This is largely due to the presence of a broader uptrend in play since June.
With reference to the monthly chart, support has been respected at the 50% Fibonacci retracement of $5.06 (horizontal dashed-blue line) to form a ‘bullish dojo’ candlestick pattern. This is a positive event and indicative of momentum to have once again shifted upwards. At present, prices have entered a corrective phase of the overall technical cycle. Positively, we view this type of softness in price-action to be healthy, as the underlying long-term uptrend remains firmly intact (as defined by the series of higher lows and higher highs evident since late-2012).
Moving forward, and in order for the broader uptrend to resume its course north, a sustained break above overhead resistance situated at the aforementioned August high of $6.29 (as represented by the horizontal red line) is required. Should this favourable scenario occur, then further gains are likely to eventuate.
Summary
Full year results from Collins Foods (ASX:CKF) were robust in our view, with the integration of acquisitions progressing well. In Australia we believe there is much scope to lift margins through store modernisations, along with further new builds, while the launch of the Taco Bell concept is an interesting (and potentially very earnings accretive) development longer term.
We remain encouraged by the growth story for Collins, at home, but also particularly abroad. With margin boosting store modernisations underway, and much lower levels of penetration for KFC in Europe versus other quick service offerings, we believe the outlook for further gains in shareholder value is robust.
With the stock trading on around 15 times FY19 earnings and with a forecast 3.4% yield, we retain a buy recommendation on Collins (ASX:CKF) for Members without exposure.
Disclosure: Collins Foods (ASX:CKF) is held within the Fat Prophets Concentrated Australian Share, Income and Small/Mid-Cap models.
