Analysis of Berjaya Food Berhad

Dear Readers

Let’s get cracking on Berjaya Food Berhad (“BJFood“).

Introduction

BJFood is in the food business and it operates a number of franchises namely:

  1. Starbucks
  2. Kenny Rogers Roasters (“KRR“)
  3. Jollibean
Starbucks

Starbucks franchise has roughly 250 stores nationwide including drive-thrus. There are 4 Starbucks outlets outside of Malaysia which are operated by BJFood’s subsidiary, namely in Brunei.

Starbucks3-600x400

KRR

BJFood owns KRR franchises in Malaysia, Indonesia and Cambodia. There are about 100 outlets in Malaysia (April 2016), 17 outlets in Indonesia (March 2017) and possibly 1 outlet in Cambodia (2014).

Jollibean

BJFood owns 33 Jollibean outlets, 12 Sushi Deli outlets and 2 Kopi Alley outlets in Singapore (April 2016). Jollibean’s signature product is its soy milk drinks, Kopi Alley sells traditional coffee and traditional food and Sushi Deli sells Japanese food of the likes of sushi, sashimi and bento.

Financials

As usual, a table prepared to give you a broader view of BJFood’s financials from FY2011 to FY2016.

DATA 2016 2015 2014 2013 2012  

2011

 

REVENUE (RM’000) 554146 376780 150369 121915 88598 71938
PROFIT (RM’000) 17878 177574 22669 18628 11126 10193
OPERATING PROFIT (RM’000) 48707 185202 7237 12347 14635 12575
SHAREHOLDERS’ EQUITY (RM’000) 388503 394419 162787 142748 56071 50793
DEBT (RM’000) 358151 326439 30694 23235 20767 13459
                                                         RATIO
DEBT TO EQUITY 0.92 0.82 0.18 0.16 0.37 0.26
OPERATING PROFIT MARGIN 0.08 0.49 0.04 0.10 0.16 0.17
OCF RATIO 0.23 0.449 0.416 0.666 0.813 1.61
PROFIT MARGIN 0.035 0.47 0.13 0.14 0.12 0.14
EPS (CENTS) 6.0 54.4 8.5 8.2 7.8 7.5
EPS (ADJUSTED) CENTS 6.0 46.9 6.0 5 3 2.8
DPS CENTS 4.25 5.75 4.25 3.50 4.50 3.00
DIVIDEND PAY OUT 0.70 0.106 0.501 0.428 0.575 0.416
P/E 30.87 5.3 17.4 16.5 12.7 12.5
ROE 5.75 45 13.9 12 19.8 20

At a glance, revenue has been skyrocketing. It increased 7 folds within a span of 5 years. Astronomical indeed. Without a doubt there is a strong demand for BJFood’s products.

But what products are doing well exactly? Well, a large chunk of BJFood’s revenue came from Starbucks. In fact, Starbucks contributed RM404.9 million to BJFood’s revenue in FY2016. That’s an overwhelming 72% of BJFood’s total revenue in FY2016.

On the other side of the coin, almost everything else is has gone pear-shaped including:

  1. BJFood’s liquidity to service its short term debts; constrained by rapid expansion.
  2. Operating margin.
  3. Profit margin.

The lacklustre profit is attributed to the loss incurred from KRR in Indonesia to the tune of RM7.6 million in FY2016. Further the profits from KRR’s operation in Malaysia declined from RM9.5 (FY2015) million to RM2.5 million (FY2016). That is a monumental decrease of about 73%.

In part, unfavourable currency exchange also affected the costs of raw materials which chewed up profit.

Not much has changed for BJFood. Its performance in FY2017 is also leaving a trial of bad memories for investors. Its latest quarter report (Q3 FY2017) indicates a declined in  year-on-year profit, from RM11 million to RM8.3 million.

BjFood’s abysmal performance hasn’t gone unnoticed by the market. BJFood share price has dipped about 7.5% from a year ago.

Conclusion

Notwithstanding the above, not all is gloom and doom. BJFood, albeit, taking a while, took cost-cutting measures by shutting down unprofitable KRR outlets. For example, there were 23 KRR outlets in Indonesia at the end of FY2016. Only 17 remain.

BJFood is also contemplating upon the disposal of non-performing businesses like KRR and Jollibean. However, there is nothing concrete to this regard as of yet.

BJFood recognises that Starbucks in the creme de la creme. In reaction to that, BJFood is increasing the number of Starbucks outlets. There may be close to 25 additional Starbucks outlets by the end of FY2017. Whether such exercise will pay off has yet to be seen.

Capitalising on the increasing demand for Starbucks’ products, BJFood made an audacious decision by increasing the prices of Starbucks beverages in January 2017 to about 10-15%, depending on the types of beverages. This would increase profit margin which has been subdued by unfavourable currency exchange rate throughout the most of FY2016.

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Beverage prices before January 2017 price hike.
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After the price hike in January 2017.
IMG-20170423-WA0007
Patron turn out is not that bad for a Saturday morning at my local mall. Credit to girlfriend .
Disclosure

I do not own shares of BJFood.

Reference
  1. FY 2016 Annual Report
  2. http://www.theborneopost.com/2017/03/18/starbucks-expansion-to-alleviate-bjfoods-cost-margin-pressure/
  3. http://www.thestar.com.my/business/business-news/2017/03/16/berjaya-food-results-dragged-down-by-kenny-rogers-roasters-losses/
  4. https://www.pressreader.com/malaysia/the-borneo-post-sabah/20161229/282385514178770
  5. http://www.theedgemarkets.com/article/%E2%80%98bfood-mulls-selling-loss-making-kenny-rogers-roasters-chain%E2%80%99
  6. https://markets.ft.com/data/equities/tearsheet/financials?s=BJFOOD:KLS

Analysis of Malakoff Corporation Bhd

Dear Readers

Let’s jump right into Malakoff Corporation Bhd (“Malakoff“).

Introduction

Malakoff is an independent power and water producer. Its businesses consist of the generation of power (in the form of electricity) and desalination of water (a process of removing salts and minerals from saline water).

The main bulk of Malakoff’s business is in Malaysia where it has a capacity to generate, from burning gas, oil and coal, about 6,346 megawatts/MW of electricity (that’s about 6.3 million watts).

On the international stage, Malakoff has a capacity of producing 690MW of electricity and a desalination capacity of 444,800 m3/day of water from assets in Australia (windmill farm), Saudi Arabia (water desalination and power), Bahrain (water desalination), Oman (water desalination) and Algeria (water desalination).

Malakoff has a simple business model. From the assets which it owns (in full) or co-owns, Malakoff generates power or desalinates water which they sell to  national grids or water utility companies.

Malakoff TBE (3) (800x533)
Malakoff’s Tanjung Bin power plant with all the bells and whistles of a modern power plant
Financials

To dissect the financials of Malakoff, I have prepared a simple table in which I only considered Malakoff’s financials since its initial public offering in 2015.

DATA 2016 2015
REVENUE (RM’000) 6098420 5301987
PROFIT (RM’000) 355463 453234
OPERATING PROFIT (RM’000) 1439370 1308858
SHAREHOLDERS’ EQUITY (RM’000) 5915712 5803550
DEBT (RM’000) 25099070 24354038

RATIOS

DEBT TO EQUITY RATIO 4.24 4.19
OPERATING PROFIT MARGIN 0.23 0.24
OCF RATIO 0.75 1.10
PROFIT MARGIN 0.05 0.08
EPS (CENTS) 7.1 10
EPS (ADJUSTED) CENTS 7.1 9.04
DPS CENTS 7.0 7.0
DIVIDEND PAY OUT (%) 0.98 0.70
P/E 19.3 16
ROE 6.03 8.62

What strikes me the most is Malakoff’s high debt to equity ratio (~4.2). That comes without surprise as Malakoff is in an infrastructure business which requires a lot of capital expenditure. I am of a personal opinion that Malakoff’s debts would not a constraining factor because of its fair cash flow.

Malakoff’s debts (secured long term debts and by issuance of bonds) are mainly in RM (86%), AUD (12%) and USD (2%). Foreign currency denominated debts are small thus posing negligible exchange rate exposure.

Malakoff’s profit margin is slim (to the tune of 5-8%). Again, that is unsurprising as it is in a wholesale business to selling power and desalinated water.

Even though revenue has seen an increase of about 15% from FY2015 to FY2016, what raises eyebrows is the decline of its earnings. According to Malakoff, its earnings were negatively impacted because of the change in the estimation of the residual values of its gas-fired power plants (remaining value of an asset after it has been fully depreciated) and a reduced tariff of an extended power purchase agreement for its Port Dickson power plant (selling power at a lower tariff).

Potentials

The initial public offering share price of Malakoff, in 2015, was RM1.80. Malakoff’s share price, at the time of writing, is RM1.22. That is in tandem with the decreased earnings in FY2016. On the bright side, there is definitely a discount of  32%.

Malakoff is embarking on an ambitious plan to acquire at least 10 power producing brownfield assets (existing assets which can be remodeled or modified) with the hope of achieving a 10,000MW power-production and 530,000 m3/day of water desalination capacity by 2020. It is looking at the European or Australian market.

EDIT: It appears that there are two conflicting reports from 2 different news portals as to whether Malakoff is considering 10 opportunities or at least 10 assets for purchase. My appreciation to rooney8 for pointing out the discrepancies. The links to the 2 different news portals are listed below:

  1. http://www.thestar.com.my/business/business-news/2017/04/19/malakoff-looks-at-buying-10-power-generation-assets/
  2. http://www.theedgemarkets.com/article/malakoff-focus-international-market

Such feat is ambitious noting that Malakoff’s current assets of RM30 billion are only producing about 7,500MW and 444,800 m3/day of desalinated water.

Conclusion

In my opinion, the attractive points concerning Malakoff are:

  1. the 32% discount on its share price from its listing price; and
  2. that it adheres, at least for now, to its dividend distribution policy of distributing at least 70% of its profit to shareholders.

If all things being equal next year, a dividend of 7 sen per share would translate into a dividend yield of 5.7% @ RM1.22 per share. This is every dividend portfolio’s wet dream.

If you are have a long-term investment horizon, Malakoff may look like an attractive proposition as any downside would be minimal as opposed to a potential upside albeit gradual.

Disclosure

I do not own Malakoff’s shares.

References:

  1. http://www.nst.com.my/business/2017/04/231906/malakoff-profits-ease-despite-higher-revenue
  2. http://www.thestar.com.my/business/business-news/2017/04/19/malakoff-looks-at-buying-10-power-generation-assets/
  3. http://www.theedgemarkets.com/article/malakoff-focus-international-market
  4. https://markets.ft.com/data/equities/tearsheet/summary?s=MALAKOF:KLS
  5. FY2016 Annual Report