✨Why did BJFOOD jump +25% last Friday? (Starbucks Malaysia)
Buyer beware... there's no "star bucks" in this Starbucks!
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If you’ve followed my blog for awhile, you’ll know that I’m quite bullish about Berjaya Corporation (BJCORP) - which I think has a conservative upside of at least 300% over the next 5 years, with minimal downside risk owing to its depressed share price. If you’d like to find out more, do click the picture below to read my BJCORP Part 1 report in its entirety:
To oversimplify, the BJCORP investment thesis is a turnaround thesis - and going by one its subsidiaries’ share price spike of +25% last Friday… turn around it has, apparently.
In my BJCORP Part 2 report, we saw how Berjaya Food Bhd (BJFOOD) is one of BJCORP’s key listed subsidiaries, whose revenues are disproportionately represented by their operation of Starbucks Malaysia stores. You can see in the table below how the Starbucks business segment represented 87% of BJFOOD’s FY21 Group revenues, and a whopping 107% of the FY21 Group PBT - implying that the remainder of BJFOOD’s other business segments were loss-making in aggregate:
At first glance, it certainly seems like BJFOOD had a blockbuster 2Q22. Its 1H22 revenues rose by nearly +30% YoY, while its 1H22 Net Profit increased by +120% YoY. Even accounting for the low-base effect and pent-up demand from the post-lockdown business environment (amidst recovering consumer sentiment), that’s still an objectively huge YoY performance boost for an F&B business.
Those improved fundamentals were pretty much reflected in the raised target prices given by sellside analysts of the local investment banks as well. Here are some of the raised target prices (TP) given by sellside analysts of the Big 5 Malaysian investment banks:
Maybank Investment Bank raised its TP from RM 2.60 to RM 3.30
Hong Leong Investment Bank raised its TP from RM 2.69 to RM 3.80
(The above links point to the same article and will only work in the desktop version of Google Chrome. If you’re using a different browser, simply scroll to find the relevant part of the article.)
As shown in their 2Q22 quarterly report (QR) above, BJFOOD’s management highlighted the main reasons behind their aforementioned performance boost, attributing that “the higher revenue was mainly due to higher same-store-sales growth particularly from Starbucks cafe outlets”. There was also an improved revenue contribution from the “improved performance from the KRR operations in Malaysia”.
If you’ve read my BJFOOD Part 2 report, you’ll know that KRR refers to their historically mediocre Kenny Roger’s Roasters restaurant chain (yes, that Kenny Rogers). Without regurgitating the full BJFOOD thesis in my Part 2 report, KRR has historically been deadweight on BJFOOD’s performance - and has barely broken even on its cumulative profits (not ROIC) since the Group’s listing in 2011.
One interesting anecdotal observation that can be made is that KRR just started selling fried chicken soon after BJCORP’s new CEO joined its parent company - which appeals better to the Chinese population in Malaysia, who make up 22% of the country’s population. Basically, it went from a Nando’s to a KFC.
Hence, the news of KRR’s new non-deadweight status was understandably a breath of fresh air to BJFOOD’s shareholders - since it was always well recognized that the Starbucks segment deserved a higher valuation if the Group’s profits weren’t weighed down by the non-performing KRR.
To provide additional context, Starbucks Malaysia is basically a mature company with limited growth scope, since it has basically already saturated most of the urban areas in Malaysia - where its higher prices are more palatable than in lower-income rural locations. Hence, the thesis for Starbucks Malaysia is that it’s basically a low-growth company which can be reasonably expected to grow its store count by ~10% annually - and therefore generate greater SSSG via periodic price hikes and slight improvements in operational efficiencies. If you’d like to learn more about the investment thesis behind Starbucks Malaysia, please navigate to the BJFOOD section of my BJCORP Part 2 report by clicking the image below:
As such, it was quite surprising to me to see BJFOOD receive such a dramatic boost to its share price, when its admittedly fantastic quarterly results were released by the company last Friday. Of course, I was quite pleased with the surprising turn of events - since BJFOOD is a key subsidiary of BJCORP. However, I couldn’t for the life of me figure out what could have contributed to such a dramatic +25% overnight spike in their share price, such as to justify a normalized (i.e. post-covid) PE ratio of 22x - assuming that the low-growth model which I described above hadn’t changed. For reference, their average historical share price has hovered at around RM 1.80 since their listing in 2011:
Hence, curiosity got the better of me, and I decided to peek under the hood to see whether anything had substantially changed at BJFOOD such as to justify its share price spike of +25% last Friday. Spoiler: The answer is NO.
Berjaya Food Berhad (5196.KL) Links:
Is BJFOOD a Star? Let’s count the Bucks
Download my Excel financial model by clicking the link below:
As we can observe from the tables above, BJFOOD’s annualized FY22 revenues rose by +28% YoY while its annualized FY22 PAT rose by +122% YoY. We’re not going to nitpick over seasonal differences for the purpose of this valuation exercise, so let’s just go along with this annualized assumption.
The purpose of the second table was to compare their FY22 annualized P&L performance to their normalized (i.e. pre-covid) P&L performance in FY19 (red column). This was done to determine whether their latest 2H22 growth reflected a secular improvement in BJFOOD’s underlying fundamentals, which could potentially lead to higher long-term earnings growth; or if they were just a temporary blip in earnings for any reason.
And indeed, a fair bit of legitimate improvement does seem to exist. Even when comparing their annualized FY22 revenues to their peak pre-covid FY19 revenues, there seems to be a legitimate +17% revenue growth. (For additional context, there were some corporate exercises involving the streamlining of operations in both FY18 and FY19, which explains the earnings volatility in those years)
Since BJFOOD’s F&B retail operations possess a relatively simple Retail sector business model, most of their performance can be attributed to same-store-sales growth (SSSG) - which in turn is entirely reflected in their revenues. Hence, BJFOOD’s ability to accrue incremental value for its shareholders can largely be boiled down to improving their revenues - all other P&L levers for earnings growth pale in comparison.
If so, then it’s quite apparent that last Friday’s share price spike of +25% can be wholly attributed to improved quarterly revenue performance. A cursory check of their margins tell the same story, where their 2H22 Net Margins nearly doubled YoY as compared to FY21 - attributed mostly to higher 2H revenues alone:
As BJFOOD reports their CFS by utilizing the Direct method, we can also quite easily observe how their P&L performance is almost a 1:1 reflection of their Operating Cash Flows - which is something to be fully expected from a Starbucks business:
As such, we can pretty much skip the analysis of their CFS and take their P&L at face value - at least for the purposes of this valuation exercise. This leaves only their Balance Sheet in question.
Naturally, the follow-up question to ask is: if their revenues didn’t increase due to cash flow adjustments, could they have increased due to an increase in store count? Since BJFOOD’s earnings performance is largely beholden to their revenues, it would be possible for them to deliver stronger revenue performance simply by rapidly increasing their store count - which would not reflect any incremental value-add per unit of invested capital (i.e. higher ROIC).
However, we can also see that this isn’t the case - as evidenced by the fact that their Balance Sheet hasn’t changed much in size over time:
In that case, we can basically rule out any financial engineering being played - and attribute their latest quarter’s improved performance to legitimate reasons. There weren’t any cash flow adjustments (e.g. significant working capital movements) which could have contributed to better revenues; nor was there any balance sheet bloat which could have delivered incremental headline revenues in the absence of incremental ROIC. Everything seems to point to BJFOOD’s revenues reflecting a legitimate improvement of SSSG at both Starbucks Malaysia and KRR as compared to previous years - and as stated by management in their latest QR.
Therefore, if BJFOOD’s revenue growth in 2H22 is actually legitimate, does this reflect a new chapter of secular growth for its shareholders? It possibly could. After all, a +28% YoY revenue growth is legitimately deserving of praise - low-base effect notwithstanding.
However, as conservative investors, it is only natural to exhaust every means of professional skepticism before giving management the full benefit of doubt. After all, it is only prudent to not take a stranger’s word at face value. Obviously, the reverse is true as well - the motto ‘innocent until proven guilty’ should be the status quo when assigning judgment upon others. But regardless, there’s also nothing wrong with being extra cautious, right?
Let us then assume the possible worst-case scenario which could exist within the facts available to us so far - purely in the spirit of prudence, and without assigning any judgment. The question then becomes: is it possible for BJFOOD to deliver +28% YoY revenue growth without justifying its +25% share price pop last Friday?
Unfortunately, the answer to that is a very affirmative Yes.
The above table reflects BJFOOD’s 2H22 revenues, as compared to the revenues of their corresponding period in FY18 and FY19 respectively. The reason why we’re using “(Q2+Q3)” revenues for FY18 and FY19 rather than simply 2H, is because there was a slight shift in reporting period in FY19. Therefore, the aforementioned “(Q2+Q3)” periods reflect BJFOOD’s revenues during the same approximate months as in 2H22 for their respective financial years in FY18 and FY19.
As we can see, BJFOOD’s revenue growth between the corresponding periods of 2H22 and “19 (Q2+Q3)” was only +33%. While that might simply appear to reflect the annualized revenue growth between FY22 and FY19 that we saw previously, ask yourself - what else besides a secular improvement in revenue growth could also explain a +33% difference in BJFOOD’s revenues between 2H22, and the corresponding pre-covid “19 (Q2+Q3)” period in FY19?
If you’ve answered “pent-up demand”, you’d be absolutely correct. Recall from my explanation above that Starbucks Malaysia is a low-growth business with not much growth headroom - and that not much has changed in the business since FY19. Their Starbucks store count only increased by a measly +12% between FY21 and FY19 - from 291 stores in FY19 to 327 stores in FY21:
As such, one conservative assumption which could potentially explain their +28% YoY revenue growth in 2H22, is that there was simply a cyclical improvement in their YoY revenues owing to pent-up demand. Recall that Malaysia reopened its economy after removing harsh lockdown measures around September 2021 - just before the beginning of their 2Q22 which started in October 2021. If so, pent-up demand alone could provide a legitimate explanation for the dramatic +28% improvement in BJFOOD’s 2Q22 revenues.
As a huge fan of the current valuation of its parent company BJCORP, it would actually be in my favor if BJFOOD’s Starbucks segment did actually deliver on improved secular growth - as the market seems to think it has. However, the conservative and contrarian value investing spirit in me is forced to acknowlege the possibility that this astounding +28% YoY revenue growth could actually just be a temporary cyclical blip - as opposed to reflecting more permanent secular changes. If such, then at the very least, it is entirely possible to make the case that there still remains too much uncertainty to justify paying 25% extra to pick up BJFOOD’s shares today as compared to just one business day prior - since it remains plausible that nothing has permanently changed in their underlying fundamentals.
Keep in mind that this is not a recommendation to partake in any particular action with regards to BJFOOD’s shares - it is simply my intention to make investors aware of this possibility. However, given BJFOOD’s lackluster long-term historical share price performance, I genuinely believe that it’s quite difficult to make the case that whatever limited improvements made over the past year within Starbucks Malaysia (which has historically contributed to >80% of Group revenues) can significantly alter BJFOOD’s long-term share price trajectory:
Valuation
While their LTM PE ratio is indeed just 14x (which might justify investing in a low-growth business), their normalized PE ratio based on FY21 earnings is approximately 22x.
And while it may still be possible to make an investment case for a low-growth Starbucks business at a 22x PE valuation (given the lower risk profile relative to sector peers), it becomes a lot harder to do so when you also add in BJFOOD’s debt of RM 629 mil to their current market capitalization of RM 1,170 mil - for a total Enterprise Value of RM 1,750 mil (after netting off RM46 mil of cash).
When benchmarked against their FY21 earnings of RM 45 mil, that’s a whopping EV/E ratio of 38x. Even for a Starbucks business, that’s a slightly tough valuation pill to swallow, especially given that:
there’s relatively little growth visibility from Starbucks Malaysia in sight; and
Starbucks Malaysia will remain a significant contributor to Group revenues for the foreseeable future (FY21: 87%).
Just to drive home how extended this overvaluation of 38x EV/E based on FY21’s earnings is, let us play angel’s advocate and consider the absolute best-case scenario. As we saw previously, BJFOOD’s blockbuster 2Q22 quarterly earnings were almost RM 40 mil. Further assume the absolute best-case scenario where there is a secular change in earnings trajectory going forward, and that we can annualize that RM 40 mil to arrive at FY earnings - for an annualized earnings of RM 160 mil (40 x 4). Even under these riproaring optimistic conditions, BJFOOD’s EV/E would still be about 11x. Keep in mind that this annualized earnings assumption of RM 160 mil would amount to 400% of FY21’s historical earnings - and that BJFOOD is not a high-growth company. While I would definitely pay 11x for BJFOOD’s shares, you would have to give them a lot of benefit of doubt to even come close to justifying that sort of valuation.
Coming back to earth, one would require a significantly higher growth rate to justify buying BJFOOD’s shares today at a normalized EV/E ratio of 38x - which from my vantage point just doesn’t seem forthcoming.
Unfortunately for BJFOOD, there’s just no “star bucks” in this Starbucks.
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