Collins Foods

Friday 27th November 2015

Hot Stock – Collins Foods

Taking flight again

What’s new?

Collins Foods’ KFC business now represents around 85 percent of total income, and has performed strongly in the past financial year, despite rising labour rates. Underlying revenue in this division was $483.1 million, up 46.7 percent from the previous year, while EBITDA increased by 43.93 percent to $74.40 million from the previous year in FY15. This was driven primarily by a strong focus on product innovation and an expanded channel reach in Australian market.

Over the past year, Collins Foods has continued to implement innovative product offerings to remain competitive, resulting in 4.8 percent growth in KFC same store sales. The company also invested in remodels of 16 stores across Queensland and Western Australia in FY15, which also has served to enhance the in-store experience for customers. In addition, the company opened six new restaurants to go with those acquired in Western Australia and the Northern Territory.

This brought Collins Foods’ total number of KFC restaurants in Australia to 197. The Company is also set to break the double century soon, with plans to open eight new restaurants in FY16, along with further remodels. While Collins Foods’ strong underlying performance in the KFC division was partially offset by a disappointing result from Sizzler, this is unlikely to be a problem going forward.

Outlook

With Sizzler now considered non-core in the Australian market, this should be to the benefit of Collins Foods’ emerging Snag Stand. The business is still in the early stages of development, but the customer offering has been refined to an extent that it is now able to be rolled out more aggressively. The focus for FY16 will be on replicating the success of the new Macquarie Centre and Sunshine Plaza restaurants, which have been built around the new ‘dine-in’ format, across other locations, with the Pacific Fair outlet remaining on track to launch towards the end of CY15.

In our view, Collins Foods has a strong ability to finance its future expansion projects with operating cash flow (CFO) in FY15 of $49.14 million, up 9.6 percent or $4.29 million from the previous year. The CFO/CAPEX ratio also has remained high at 151 percent, suggesting the company is generating over 1.5 times the cash needed to cover its capital expenditure. Cash reserves have also increased by 14 percent to $42.23 million.

Price

From a valuation perspective, Collins Foods continues to offer value in our, with the company currently trading at a price to earnings ratio of 12.6 times and yield of 3.4 percent. Furthermore, the fundamental picture appears to complement the technical view, with the Collins Foods’ share price having recently pushed above resistance at $2.80 to be currently trading just below the all-time high of $3.86. With the RSI almost neutral, we anticipate further gains to the upside over the coming weeks.

Worth buying?

While the Australian Sizzler business has now been categorised as non-core, it is worth remembering that the segment is still expected to make a positive contribution to the Group’s EBITDA in FY16, with this due largely to continued momentum in the Asian franchise. The strategic decision to put Sizzler on care and maintenance is also expected to enable management to focus more on the operating performance and growth opportunities across its core businesses - KFC and Snag Stand.

Greg Smith is Head of Research at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE

Disclosure: Collins Foods is held within the Fat Prophets Concentrated Australian Share, Income and Small/Mid-Cap models

Comments from our readers

No comments yet