Sharechat Hot Stock: Collins Foods (CKF)

Fat Prophets

Friday 3rd July 2015

Culling the hangers on

What’s new?

Full year results to 3 May 2015 from Collins Foods marked a continuation of a familiar theme, with a robust performance by the primary KFC business, but Sizzler doing anything but. However the difference this time around is that management have acknowledged they are fighting a losing battle with Sizzler, taking an impairment hit, and deeming the business to be non-core.

At the top line the company saw revenue rise 29.7 percent to $571.6 million with KFC leading the charge, and same store sales up 4.8 percent (and underlying turnover up 46.7 percent). A capital investment and refurbishment program continues to deliver the goods, so no surprise that management has kept the foot down here. The past year has seen 6 new KFC restaurants built, in addition to 16 major refurbishments.

The investment focus on the KFC business has not only yielded improvements at the top line, but also the bottom with ‘continued margin improvement’ across the core network’. This underpinned at 37.5 percent gain in EBITDA (earnings before interest tax, depreciation, and amortisation) to $67.4 million and an even stronger 46.4 percent rise in underlying EBIT to $45.1 million.

Taking the shine off a strong performance at KFC though was Sizzler, with management taking a $37.5 million non-cash pre-tax impairment charge on the chain. As a consequence statutory net profit after tax came in at $10.4 million.

We have said in previous reports that the egg timer was running on the time to turn around the Sizzler business, and it seems management’s patience has been exhausted. As a result of the strategic review management have deemed the Sizzler Australia business to be non-core, and will not be investing any further capital into the business.

The company plans to close a number of restaurants, with the remainder put under close watch. That said management still expect the business to deliver a positive earnings contribution in 2016. We think the decision to finally place Sizzler in the ‘non-core’ basket will be cathartic for the company, and we are not surprised the market has responded positively.

We envisage the remaining Sizzler Australia stores will be pegged for disposal at some juncture. Management does however intend to press on with the format in Asia where the dynamics, and customer receptiveness, seems more positive. The company is also continuing with its embryonic Stag Stand concept, although rightly in our view, this is at a measured pace.

Outlook

Following the strategic ‘casting off’ of Sizzler we believe that Collins will only go from strength to strength as it directs even more focus towards its core KFC business which is performing well. We also remain encouraged by the fact that the company continues to expand its footprint, and particularly in South East Queensland, which should see some economic tailwinds on the back of further weakness in the AUD.

Price

We regard the shares as attractively priced, despite a solid share price performance over the past year. The shares currently trade on around 10.2 times FY16 earnings. Collins also comes with a 4.3 percent dividend yield for additional taste.

Worth buying

The company continues to tick the boxes on a number of fronts, having successfully lifted earnings through targeted refurbishments, and acquisitions to expand its footprint. The ‘defensive’ aspect of the ‘Colonel’s’ offering also helps of course. Given these positive investment traits and our view that Collins Food’s current valuation is undemanding, we rate the stock as a Buy.

Disclosure: Interests associated with Fat Prophets declare a holding in Collins Foods.

Greg Smith is the Head of Research at Fat Prophets share market research. To receive a recent Fat Prophets Report, call 0800 438 328 or Click here.

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