11-04-2007: KFC out to regain investor confidence

KFC Holdings (RM5.75) is staying on track to regaining investor confidence in the company. The stock was shunned following negative publicity surrounding its sometimes rancorous boardroom and shareholder tussles over the past few years.

The company certainly appears to have improved its operations and balance sheet while earnings have recovered pretty well in 2005-2006. Under prevailing operating conditions, we estimate earnings should grow by about 12% or so this year – to roughly 56.1 sen per share. That implies the stock is trading at fairly decent price earnings ratio (P/E) of roughly 10.2 times.

End of shareholder uncertainty
After a series of very public tussles for control, Kulim is now firmly ensconced in the driving seat. The company holds a 57.4% interest in QSR Brands, which in turn owns 42.9% of KFC.

QSR has made a general offer for all remaining shares in KFC that it doesn't already own at RM4.94 per share. The offer closes on April 23. But the stock has been trading well above this offer price suggesting that the market is betting on better returns from the fast-food operator. KFC's share price rose as high as RM6.40 earlier this year before giving back some gains following the global sell-off in late February.

New look, new products
KFC recently launched a new brand logo, which features bolder colours and a more well-defined Colonel Sanders in a red cook's apron, in line with the worldwide redesign of KFC restaurants. The company expects to remodel all its outlets over a two-year period.

Restaurant turnover was up by some 8.4% in 2006, and should continue to grow at a similar pace this year. KFC has added five new outlets for the year-to-date and intends to open another 11 by year-end. At the last count, the company operates 449 restaurants in Malaysia, Brunei and Singapore.

In addition to offering customers a fresh dine-in ambience, KFC has also added rice to its menu. The staple food is now offered as the "Colonel Rice Combo" along with two pieces of chicken, coleslaw and a regular carbonated drink.

Improved cash flow and balance sheet
Its various measures to rationalise operations appeared successful. KFC's balance sheet strengthened over the past two years with better cash flow. Net debt was reduced from RM332 million at end-2004 to RM35 million last year. We expect this trend to continue even after taking into account the higher capital expenditure to remodel its restaurants.

Cash returns to shareholders have also risen gradually with the improved balance sheet. Dividends totaled 18 sen per share in 2006. (The entitlement date for the 14 sen final dividend has yet to be announced.) Based on the company's minimum 25% payout policy and our earnings forecast, dividends could grow to 20 sen per share this year. This translates into a yield of roughly 3.5% at the current share price. - InsiderAsia

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.