Going for a Third Bite
It seems that the third time is indeed the charm, with Taco Bell’s latest attempt to launch in Australia having early success. The country’s largest KFC operator, Collins Foods (ASX:CKF), has announced plans to roll-out the Mexican offering across three states over the next three years. With attractive growth prospects for a ‘defensive’ stock, we maintain our BUY rating on Collins.
What’s New?
Last month (FAT-AUS-890), we covered the company’s Annual General Meeting wherein management provided more colour on FY18, which was as a positive year with both operational and financial improvements. That aside, we also noted Collins’ defensive strength, being somewhat ‘recession proof’ as the biggest KFC operator in Australia, while having growth prospects in the underpenetrated European market following acquisitions in the Netherlands and Germany.
The shares have pushed higher since our last buy recommendation, and we believe that the market is appreciating the longer-term growth story that Taco Bell presents. This is also as the company gradually shifts out the underperforming Sizzler brand in Australia, which has largely been seen as “something generic” and losing ground to food vans and pop-up restaurants which are becoming a mainstay.
The long-term potential in Taco Bell is grounded on a secular shift in consumer interests with an explosion in the popularity of Mexican Food over the last 10 years. In fact, referencing Urbanspoon/Zomato – a restaurant information service – shows that listings in this category have seen a meteoric rise from close to nil up to over 700 restaurants.
That said, a notable development last week occurred when Collins Foods (ASX:CKF) announced that it has entered into a Development Agreement with Yum! Brands (NYSE.YUM) to open over 50 new Taco Bell stores across three states between 1 January 2019 and 31 December 2021. Consequently, the shares jumped circa 5.6% on the day of the announcement.
Before moving on, a brief recap about Taco Bell’s history in Australia. For Members not aware of the long history of the brand, Taco Bell’s first efforts into the Australian market started in 1981 with two stores under the Taco Amigo brand (which lost a lawsuit to Taco Bell’s Casa) but it didn’t become a multi-generational mainstay and disappeared six years later in 1987 due to weak sales.
Decades later and in the late 90s, Taco Bell, this time under YUM, tried again for second time though once again fell short with only four stores opening before pulling the plug in 2005.
Apparently, Taco Bell was just a tad too early, as a few years later proved to be the boom period for Mexican cuisine (as noted above) leading to the growth of home-grown brands like Guzman y Gomez and Mad Mex. However, it seems that all it needed was a bit more time and an Australian touch to be a success.
Collins Foods (ASX:CKF) opened its “test-site” last November at Annerley in Brisbane. This was Taco Bell’s first location in Australia for more than a decade, and was redeveloped from an old Sizzlers store and is right next to one of its KFC stores.
The move proved to be quite timely, with Brisbane seeing a ‘Food Renaissance’ with an increasing acceptance for international sustenance, and with the experienced hand of Collins Foods (ASX:CKF) proving just the trick.
The excitement was also clearly evident with media reports on opening day indicating around 50 people camped out for the 9 am ribbon-cutting, with many being interstate visitors. Since then, management noted that it continued to be a success with demand and interest far exceeding expectations as lines of customers piled up for months. We’ve even seen first-hand the long queues out the door in the store we visited.
Image Credit: Taco Bell
Aside from the greater acceptance of Mexican cuisine, we believe a substantial factor to its success owes to the prudent and well-implemented localisation compared to Taco Bell offerings in the US which have a significant chunk of low-priced items. The setup in the Annerley site gives diners an upmarket ‘casual dining’ feel and quality at QSR (quick service restaurant) prices with some unique offerings and specialties.
Source: 04 October 2018 Investor Presentation
The Development Agreement didn’t provide specific timing as to the expansion or locations but has confirmed that one of the three states is Queensland. Specifically the company plans to open up in the South East area, targeting Cleveland, North Lakes and Robina by December.
Though there is a note that specifies an annual new build restaurant number, these specifics are undisclosed. Collins does get a ‘right of first offer’ where it has the ‘dibs’ on new restaurant locations in the relevant states – this reduces risk for the company as it can opt out of locations deemed dubious. The company disclosed that it will fund the expansion via internally generated cash flows.
Aside from the filing, the company did outline a growth strategy in the accompanying investor presentation showing plans to expand up to 141 new stores in its main brands (including Taco Bell) and supporting growth further with acquisitions when the opportunities arise.
Source: 04 October 2018 Investor Presentation
Overall, we are encouraged by the developments and look to the significant runway for growth the company has paved for itself. We will continue to monitor developments going forward.
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 $5.81. This is a positive event. Our scenario of a break above resistance sighted at the June high of $5.90 and psychological $6.00 level has also played out. A bold move above the 2017 high of $6.29 is also an encouraging event.
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. The 2017 high at $6.29 has also been breached, and prices have moved on to hit all-time highs this week, adding to the bullish picture.
Summary
Last week, Collins Foods (ASX:CKF) entered into a deal that will secure a store pipeline for its fledgling Taco Bell brand in Australia which covers a roll-out of over 50 new stores across three states in Australia between January 2019 and December 2021. It seems that the third time is the charm for the brand as early results have been strong enough for Collins to look at a nationwide expansion.
On a valuation front, the shares trade on around 19.0 times FY19 earnings, but this drops away to 17.5 times for FY20. The dividend yield over the same timeframe moves from 3.2% to 2.9%.
With the company’s core brand (KFC) somewhat ‘recession proof’ and giving it a defensive strength, Collins is coupled with growth thanks to an underpenetrated European market with the Taco Bell rollout in Australia also providing a longer term boost.
According, we maintain our 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.
