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Collins Foods (CKF)

Fat Prophets

Friday 22nd August 2014

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Fat Prophets

Collins Foods (CKF)

What’s new?

KFC operator Collins Foods has served up another strong quarterly update, with net profits rising by 21 percent in the 12 weeks to 20 July 2014 to $4.5 million. Top line revenues have continued to climb at a steady clip (up 28 percent $124.3 million) despite the headwinds facing the fast food and casual dining segments. This augurs well for further profitability gains as competitive pressures abate.

Turnover was boosted by the acquisition of Competitive Foods but same store sales were also up by 3 percent across the company’s 169 KFC restaurants. Integration efficiencies from adding Competitive’ s WA and NT stores to the mix look to be bearing fruit. - same store sales here grew 4.2 percent. 

The company’s Sizzler business, meanwhile, is clearly in need of some reparative care, and under-performance here has seen the company’s non-exec director and second largest shareholder lock horns with rest of the Board. The end result could well be a shortening of the rope afforded to turn the Sizzler business around. Either way this could ultimately benefit shareholders.

Outlook

Scepticism has emerged from within the Board on the ability to turn Sizzler around. Non-Executive Director and 17 percent shareholder Steven Copulos has disagreed with management’s strategy here. Mr Copulos reckons that Collins is better off focusing on the core KFC business which is clearly performing well. Mr Copulos certainly knows the franchise inside and out, being behind the second largest KFC franchisee (NSW focused) in Australia.

Mr Copulos also has concerns over corporate governance and has urged that shareholders vote against certain resolutions at the AGM. The key bone of contention though appears to be Sizzler.

In our view the issues raised by Mr Copulos will force the company’s hand somewhat in terms of potentially re-evaluating the strategy on Sizzler. Indeed, the Board has responded that it intends to evaluate the impact of the ‘Get Refreshed’ initiatives and ‘make a decision on the future direction of the Sizzler brand; by the end of the current financial year. ‘

Price

Turning to the charts, the outlook is positive with prices recently breaking above long term resistance at $2.19. This level is now acting as firm support and should set the foundation for higher levels over the medium term.

Worth Buying?

The current Board split is something of a warning bell on the face of it, but delving through the issues, the key one is really how Sizzler fits into the equation. We believe the timeline for making a call on the brand has been brought forward by the issues raised by Mr Copulos.  Management will need to provide some evidence that current initiatives are working or will need to reconsider the exposure here by year end. Whilst the Board split may ruffle some feathers, such intervention may ultimately prove beneficial to long term shareholder value.

The company will either be free to focus on driving value at its core KFC business, or will be able to add another source of earnings growth to the table if Sizzler can be turned around.

Collins Foods is currently trading at around 10.4 times earnings for 2015 and around 9.6 times estimated earnings for fiscal 2016. We regard these multiples as modest given the healthy outlook for growth at the core KFC business, the attention being brought to Sizzler, and an impressive fully franked dividend of 4.4 percent

 

Disclosure: The author,and interests associated with him, hold shares in Collins Foods.

Greg Smith is the Head of Research at Fat Prophets.

 

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