Berjaya Food’s Performance Is Expected to Increase in FY2022 as Covid-19 Eases Restrictions

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BERJAYA Food Bhd (BFood), which operates the Starbucks Coffee and Kenny Rogers Roasters (KRR) café and restaurant chains in Malaysia, anticipates improved financial performance in the fiscal year ending June 30, 2022 (FY2022), as Covid-19 restrictions ease, resulting in increased economic activity.

Although the government’s severe mobility constraints implemented in June had an effect on the food and beverage (F&B) retailer’s 1QFY2022 performance, BFood CEO Sydney Lawrance Quays thinks that the recent relaxation of dine-in restrictions will assist soften and alleviate the financial impact over time.

Since Aug. 20, fully vaccinated persons in states participating in Phase 1 of the National Recovery Plan have been permitted to dine in restaurants.

“We predict that performance in FY2022 will increase as a result of the enterprises’ sustained resilience, even in the face of sporadic business disruptions induced by the lockdowns. Additionally, with the increased vaccination rate, more sectors have been permitted to operate, which means increased foot traffic to our stores,” he writes in an email.

“With dine-in now permitted and the possibility of cross-border travel in the near future, we are sure that business momentum will resume and become even stronger in FY2022 as the economy returns to a new normal,” Quays adds, without providing exact figures.

The downside risks are unpredictable market conditions and the sporadic application of Covid-19 control measures, he notes.

BFood returned to profitability in the fiscal year just completed, posting a net profit of RM47.36 million, up from a net loss of RM19.58 million in FY2020. This was achieved despite a 13.3% increase in income to RM717.27 million.

According to Quays, FY2021 would be a “very unpredictable year” for corporate operations because to disruptions caused by the Covid-19 pandemic. “This atmosphere has been detrimental to us and has had a detrimental effect on the overall food and beverage business as a whole,” he says.

Nonetheless, the group’s FY2021 results above consensus forecasts, which Quays attributes to his team’s efforts in scaling the business and optimising costs, as well as its agile re-strategy efforts to refocus the firm on adapting to changing customer behaviours.

“With the business’s resilience and improved profitability in FY2021, we anticipate that the business will be stronger in every element, enhancing profit, sustaining growth, and shareholder returns,” he continues.

The group reported a net profit of RM14.27 million for the fourth quarter ended June 30, 2021 (4QFY2021), an increase of 22.9 percent from RM11.61 million in the third quarter ended June 30, 2021 (3QFY2021). Year on year, it returned to profitability following a net loss of RM30.16 million in 4QFY2020, owing to a one-time recognition of income from deferred sales associated with the June launch of a new Starbucks Rewards programme in Malaysia.

“The previous Starbucks programme had existed for ten years. In June, we introduced the new Starbucks Rewards programme as a spend-based programme. This enables our Starbucks brand to deliver a more flexible and superior digital customer experience with the addition of new innovative features that help us serve consumers better,” Quays explains.

“We also intend to provide more features to the new rewards system and app that will enhance their customer journey and make the Starbucks experience more holistic.”

Starbucks’ expansion ambitions are on track

BFood, for its part, has implemented a number of steps to bolster the recovery picture.

For starters, the organisation is increasing its retail expansion in terms of shop ideas, including additional drive-thru locations and new locations in smaller towns, neighbourhoods, and communities that are more convenient for customers and easily accessible, according to Quays.

According to a Sept 13 research by RHB Research, BFood management intends to extend its existing Starbucks network by 35 to 40 locations in FY2022, with 45 percent of those locations being drive-thru. In FY2021, the group added 11 Starbucks locations, bringing the total to 327.

According to Quays, the group will invest approximately RM65 million in this development.

Regarding the impact of delivery and drive-thru sales to Starbucks, he estimates that each contributes approximately 20% to 25%. However, with dine-in now permitted, BFood anticipates that delivery sales would decline.

Apart from development goals, BFood will continue to focus on cost optimization to ensure profitable growth for each of its businesses, according to Quays.

“We are also implementing key marketing promotions methods in order to generate enthusiasm among our customers and to increase their visits. Additionally, we are focusing on upgrading our digital loyalty programme to help us grow our customer base and experience,” he says.

BFood’s earnings have been dragged down significantly in recent years by the loss-making KRR businesses, and the group has made significant progress to cut its losses by eliminating unproductive locations. In FY2022, BFood aims to close at least three KRR locations.

Quays notes that KRR achieved profitability in 1HFY2021. However, it reverted to negative territory following the implementation of the second Movement Control Order (MCO 2.0) in 3QFY2021, which reinstated dine-in restrictions. KRR locations rely more on dine-in clientele.

At the end of June, the country had a total of 71 KRR locations. Quay argues, however, that approximately half have underperformed as a result of the dine-in restrictions.

With the recent addition of dine-in, the group anticipates that KRR will return to profitability within the next few months.

Investors are paying attention to BFood’s shares

BFood shares — in which tycoon Tan Sri Vincent Tan Chee Yioun currently holds a direct and indirect 62.68 percent stake — have recently been on investors’ radars, with the Social Security Organisation (Socso) emerging as a significant shareholder after acquiring 16 million shares on Sept 2, bringing its stake above the 5% threshold to 5.03 percent. Socso subsequently sold 143,000 shares on Sept. 9 and ceased to be a significant stakeholder.

The stock is up 26.25 percent year to date and 75.65 percent year to date, closing at RM2.02 on Wednesday. BFood is trading at 13.47 times its future 12-month profits, with a market value of RM778.6 million.

Quays attributes the stock’s increases to the public’s faith in the BFood team, which has worked diligently to deliver outstanding quarterly results despite market volatility and an uncertain business climate due to the epidemic.

According to Bloomberg statistics, all six analysts who cover BFood have a “buy” rating on the company. The average price objective is RM2.60, implying a potential upside of 29%.

BFood’s borrowings totaled RM286.22 million as of June 30, 2021, while it held RM17.45 million in cash. It had a net debt of RM268.77 million and a net gearing ratio of 0.72 times.

Quays asserts that the group does not see a need to raise further capital and is confident in its ability to generate returns on existing borrowings.

BFood also owns Jollibean Foods Pte Ltd, which operates the Jollibean, Kopi Alley, Sushi Deli, and DanGo brands in Singapore and Malaysia.

“We have no intention of divesting any of these brands. BFood will focus on its Jollibean and Sushi Deli brands under the banner of Jollibean Foods, as both brands have operated normally despite Singapore’s lockdowns. We anticipate that once we achieve a new normal, these brands will continue to perform well and produce cash flow.

“BFood is a market leader in the food and beverage industry, with a wide portfolio of trusted brands that will drive profitable and sustainable growth, as well as shareholder returns. If there are brands that have the potential to generate value to our shareholders, BFood will evaluate every option,” Quays says.

Published by Zack Baharum

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