Collins Foods (CKF)

Fat Prophets

Friday 4th July 2014

Collins Foods (CKF)

What’s new?

Collins Foods has continued to grow top line revenues despite the fact that the fast food and casual dining segments remain highly competitive, with sales growth driven largely by the core KFC businesses in NSW and QLD. Management have also successfully implemented efficiency and productivity initiatives that have resulted in improved margins across their network of stores.

Recent full year results exceeded guidance with Net Profit after Tax up 9.3% for the year to $17.9 million. Revenues were up 3.9% to $440.6 million while net operating cash flow was also ahead strongly by 9% to $44.9 million. KFC Queensland same store sales were up 0.8%, which was ahead of expectations.

Over the past 12 months, the company has opened four new restaurants in Queensland and the recent acquisition of 42 restaurants from Western Australia based Competitive Foods has grown the total store footprint to 168.

Net debt has increased by $46.4 million to $127.4 million, mainly due to funding requirements for recent acquisitions. Additional spend of $20.6 million has been earmarked to fund new stores and several remodels in Queensland.

We do not see the increased debt load as a major cause for concern. Recent acquisitions are highly accretive, integrations are complete, and refinancing has been achieved on improved terms.

The company’s Sizzler operations have been more problematic, with margins under pressure and overall revenues down 9.3% on the year before. However a turnaround plan is underway, with management using the lessons learnt at the KFC operations. Front of house re-modelling is progressing in order to re-engage with customers.

Outlook

Given the lower penetration of the KFC brand in Western Australia, the Competitive Foods acquisition provides an excellent opportunity for Collins Foods to expand their footprint within the state. Collins plans to roll out three new restaurants in Western Australia per year, in addition to the five new locations set to open in Queensland in the next 12 months.

With the KFC business running well, management are repositioning the Sizzler brand as a fresh and contemporary dining experience. We expect management will continue to remodel and revamp existing Sizzler outlets before any further Australian expansion.

Price

The share price of Collins has firmed recently and has popped above the $2 mark. We believe that recent full year numbers could set the stall for increasing investor appetite. It may not be long therefore before the share price is challenging previous highs once again.

Worth Buying?

The stock is currently trading at around 11 times earnings for 2014 and around 9 times estimated earnings for fiscal 2015. Given the healthy outlook for growth and an impressive fully franked dividend of 5%, we do not see these multiples as demanding, nor do they reflect the potential upside for the company in the medium term.

We therefore believe Collins Foods is worth buying for investors with a medium term investment horizon

Greg Smith is the Head of Research at Fat Prophets.

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