A family favourite
In terms of defensive offerings, Collins Foods (ASX:CKF) has certainly been a favoured exposure within the Fat Prophets Portfolio. The share price of Australia’s largest KFC operator has increased steadily from a botched IPO a few years ago, with management growing earnings astutely both organically and through acquisition.
We have long regarded the core KFC product as somewhat ‘recession proof’ and while Australia to date has been very ‘lucky’ in this regard, we do expect that Collins’ businesses will continue to perform well, even if consumers tighten their wallets further. This is also while the foundations for future earnings growth are being laid offshore via expansion into Europe, and domestically through further acquisitions, and the rollout of the Taco Bell offering.
The shares trade on around 19 times FY19 earnings, but this drops away to 15 times for FY20. The dividend yield over the same timeframe rises from 3.2% to 3.4%.
We retain a buy recommendation on Collins Foods for Members without exposure.
What’s new?
Collins Foods (ASX:CKF) held its AGM last week, with management able to reflect on what was a positive financial year, financially, and operationally. The company has make acquisitions domestically and offshore, while a focus on margins has also supplemented the bottom line. Looking ahead the company also has a number of avenues from which to drive strong earnings growth in our view.
For the full year, group revenues leapt 21.7% to $770.9 million. An expansion of the store footprint drove the top line. During the period the company acquired 25 restaurants in Australia, along with 15 in Germany and 18 in the Netherlands.
Source: AGM Presentation
At the bottom line, earnings before interest tax depreciation and amortisation (EBITDA) rose 16.4% to $94.5 million with astute cost control to the fore. 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: AGM Presentation
Looking at Australia, with 222 restaurants, Collins Foods (ASX:CKF) now has 35% of the national KFC footprint and is the largest operator. The company expects to open a further net 8 sites in FY19, and is also continuing a tried and tested strategy of select store modernisations to lift margins. 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.
Source: AGM Presentation
As we have covered at some length previously, the company has expanded its wings offshore, and now has 18 restaurants in the Netherlands, and 17 in Germany. European sites delivered revenues of $91.6 million and underlying EBITDA of $6.6 million in FY18. The company plans to build around 6 restaurants in FY19, and is continuing to target higher margins through newer store fit-outs. The opportunity in Europe remains strong in our view, given the under-penetration of KFC versus the likes of competing offerings such as McDonalds and Burger King.
Source: AGM Presentation
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 last November and has performed strongly by all accounts (and given the photos of queues out the door). Three further openings are planned before the end of the calendar year. The Brisbane site 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.
Source: AGM Presentation
‘Know when to hold em’ and also ‘know when to fold em,’ as they say, and management had done the latter with respect to the underperforming Sizzler brand. After two closures there are now just 13 sites in Australia, with the offering here regarded as ‘non-core’. The story is better in Asia where Sizzler royalty revenues rose 9.7% with 5 new restaurants opened in Thailand and a total of 73 in Asia at year end.
Balance sheet wise Collins is in good shape, and despite a flurry of acquisitions at home and abroad, and thanks to last year’s rights issue. Net debt has increased by $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- management expects the net leverage ratio to fall ‘below 2’ in the near-future.
Source: AGM Presentation
Turning to the charts, and with reference to the daily chart, support at the October 2017 low of $5.40 has been retaken. Prices have moved above initial dynamic support at the 200-day moving average (green line), and the 50-day moving average (red line) at $5.50. this is a positive event. We now favour an eventual upside break above resistance sighted at the June high of $5.90 and psychological $6.00 level.
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 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
In terms of defensive offerings, Collins Foods has certainly been a favoured exposure within the Fat Prophets Portfolio. The share price of Australia’s largest KFC operator has increased steadily from a botched IPO a few years ago, with management growing earnings astutely both organically and through acquisition.
We have long regarded the core KFC product as somewhat ‘recession proof’ and while Australia to date has been very ‘lucky’ in this regard, we do expect that Collins’ businesses will continue to perform well, even if consumers tighten their wallets further. This is also while the foundations for future earnings growth are being laid offshore via expansion into Europe, and domestically through further acquisitions, and the rollout of the Taco Bell offering.
The shares trade on around 19 times FY19 earnings, but this drops away to 15 times for FY20. The dividend yield over the same timeframe rises from 3.2% to 3.4%.
We retain a buy recommendation on Collins Foods (ASX:CKF) for Members without exposure.
Disclosure: Collins Foods (ASX:CKF) is held within the Fat Prophets Concentrated Share, Income, and Small/Mid-cap managed account portfolios.
