KFC franchisee, Collins Foods, has embarked on an expansion in Europe, acquiring 11 stores in Germany. Brokers are upbeat about the potential.<\/p>\n
-Expansion provides potential for re-pricing of the company's growth profile By Eva Brocklehurst<\/p>\n KFC franchisee, Collins Foods ((CKF)), has embarked on an expansion in Europe, acquiring 11 KFC restaurants in Germany for around $18.4m. The restaurants will be acquired directly from the franchisor, Yum! Brands, as part of that company's strategy to reduce direct equity interests in KFC restaurants.<\/p>\n Brokers observe, with a relatively small up-front investment, the acquisition provides Collins Foods with a growth option outside of its maturing Australian market. KFC is under-represented in Germany, with just 140 KFC restaurants in a country with a population of 82m compared with around 650 KFC restaurants in Australia with a population of 23m.<\/p>\n In Deutsche Bank's view, the acquisition has potential to cause a re-pricing of the company's growth profile, given there are some concerns regarding an ability to expand its portfolio since the entry of Restaurant Brands into the Australian market.<\/p>\n The broker assumes the acquired stores generate an earnings margin of 11% pre corporate costs. The broker does not incorporate more acquisitions in Germany into forecasts but notes the potential for further margin upside from increased scale. Deutsche Bank has a Buy rating and $5.20 target.<\/p>\n Canaccord Genuity has upgraded FY17 and FY18 earnings per share (EPS) estimates by 10% and 11%, respectively, following the inclusion of the acquisitions in its forecasts as well as an increased contribution from Sizzler Asia. This change in ownership strategy by Yum! Brands is considered to be a significant tailwind for Collins Foods. Yum! Brands intends to increase franchise restaurant ownership to 98% by FY18, from 77% currently.<\/p>\n Yum! Brands has 9,978 franchised and owned KFC restaurants, providing a significant opportunity for Collins Foods to scale up, in the broker's opinion. Canaccord Genuity expects Collins Foods will benefit from compounding earnings accretion and expansion of its price\/earnings ratio as the stock re-rates to a growth multiple.<\/p>\n Investors are expected to continue targeting companies with strong cash flows that are perceived to be defensive in relatively volatile times. The broker retains a Buy recommendation with a $5.66 target.<\/p>\n Moelis estimates the acquisition adds around 4% to EBITDA and 2% to EPS in FY17, with Europe making a progressively increasing contribution in subsequent years. This broker also envisages the acquisition alleviates some concern over limited growth opportunities in Australia. Evidence of a material number of new stores being added to the pipeline should provide the catalyst for further upside, in the broker's view. Moelis retains a Hold rating and $5.54 target.<\/p>\n UBS believes the entry into Germany will provide an opportunity to leverage the management experience of Collins Foods as well as improve margins. The broker notes that chicken-related fast food represents only 1.7% of the total market but is the strongest growing category.<\/p>\n The broker's initial analysis suggests accretion of around 2% on a full year basis, premised on revenue growth of 1.5% and earnings margins of 11%. Nevertheless, in the domestic market UBS suspects the weakening macro environment in Western Australia could impact like-for-like sales growth for KFC in FY17. The broker maintains a Neutral rating and price target of $4.75.
\n-Change in Yum! Brands strategy a spur for Collins Foods' growth ambitions
\n-Alleviates some concern over limited Australian opportunities<\/strong>
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