##{"id":58839,"date":"2011-09-14T10:53:11","date_gmt":"2011-09-14T00:53:11","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/09\/14\/stockbrokers-welcome-collins-foods-with-buy-ratings\/"},"modified":"2011-09-14T10:53:11","modified_gmt":"2011-09-14T00:53:11","slug":"stockbrokers-welcome-collins-foods-with-buy-ratings","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/09\/14\/stockbrokers-welcome-collins-foods-with-buy-ratings\/","title":{"rendered":"Stockbrokers Welcome Collins Foods With Buy Ratings"},"content":{"rendered":"

\n\t– Brokers pick up coverage on Collins Foods
\n\t– Both UBS and Deutsche Bank rate stock as a Buy
\n\t– Upside from continued solid same store sales growth
\n\t– New store openings, refurbishments should also grow earnings<\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tCollins Foods ((CKF<\/span>)) is one of Australia's largest restaurant operators, controlling 119 KFC restaurants under franchise agreements and 26 Sizzler Restaurants as the owner of the Sizzler trademark in Australia and in 68 other countries.<\/p>\n

\n\tShares in Collins Foods listed on the ASX<\/span> on August 4 and brokers are now picking up coverage, with both UBS and Deutsche Bank initiating coverage on the stock this week. Both brokers are positive, commencing coverage with Buy ratings.<\/p>\n

\n\tUBS points out Collins Foods has historically delivered resilient growth, as same store sales growth for KFC has been 5.9% and for Sizzler 6.3% from FY02<\/span> to FY11<\/span>. Refurbishment of stores should see solid growth continue, Deutsche noting 84 of the KFC stores are expected to be refurbished over the next five years. This compares to 19 refurbishments over the past three years.<\/p>\n

\n\tNew store openings should also deliver some growth. According to Deutsche Bank, the franchise agreement under which Collins Foods operates will allow for new store openings of up to seven new stores annually over the next five years. <\/p>\n

\n\tUBS agrees, noting management expects to open 25 KFC and nine Sizzler restaurants over the medium-term. This would equate to 24% restaurant growth from current levels, a positive as since 2005 new KFC restaurants have generated average pre-tax return on invested capital (ROIC<\/span>) of 38%. Refurbishments have generated an average ROIC<\/span> of 24%.<\/p>\n

\n\tDeutsche expects this will underpin three to five year capitalised<\/span> annual growth in earnings per share (EPS) growth of around 10%. Forecasts reflect this, Deutsche expecting EPS for Collins Foods of 27c<\/span> in FY12<\/span> and 30c<\/span> in FY13<\/span>.<\/p>\n

\n\tBy way of comparison, UBS is forecasting EPS of 27c<\/span> and 29c<\/span> respectively and expects capitalised<\/span> annual EPS growth of 8% for FY12-FY14<\/span>. <\/p>\n

\n\tCollins Foods should be able to fund this growth, as UBS notes the balance sheet is in solid shape. Fixed charge cover stands at 2.6 times and debt\/EBITA<\/span> (earnings before interest, tax and amortisation<\/span>) is at 2.1 times. <\/p>\n

\n\tThe strong balance sheet should also support dividend payouts, UBS expecting Collins Food will have a payout ratio of better than 50%. This implies a FY12<\/span> dividend yield of more than 6% on UBS's numbers, fully franked.<\/p>\n

\n\tOn a sum-of-the-parts basis UBS values Collins Foods in a range of $2.77-$3.26. Price target has been set at $3.00, roughly in the middle of this range. Deutsche similarly has a target of $3.00 per share, which is based on the broker's discounted cash flow valuation.<\/p>\n

\n\tAt current levels, Deutsche suggests the valuation of Collins Food is compelling, as earnings forecasts suggest a FY12<\/span> earnings multiple of 7.4 times. This is well below the listed ex-100 retailers average of 11.2 times and suggests good relative value in Deutsche's view, especially given the current uncertain economic environment.<\/p>\n

\n\tThe major risk to the story according to Deutsche is delays to roll-outs and refurbishments, while there is also the risk of the franchise agreement with Yum! being terminated. This is viewed as unlikely but cannot be completely discounted.<\/p>\n

\n\tA strong and experienced management team helps reduce risks to the Collins Foods story, as UBS notes CEO Kevin Perkins has been with the company for 32 years and the top five executives have an average of 26 years service.<\/p>\n

\n\tSince listing Collins Foods shares have traded in a range of $1.92 to $2.48. As at 10.40am<\/span> today the stock was 2c<\/span> higher at $2.05, which suggests significant upside relative to broker price targets.<\/p>\n

\n\t <\/p>\n

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