MK Restaurant Group

 MK Restaurant Group Plc (BEC)

Above expectations
M posted a core profit of Bt529m for 3Q13, up by 5% YoY and 10% QoQ. The result beat our estimate and the consensus by 8%, due to fatter-than-expected margins.   
Results highlights
The firm resumed YoY earnings growth in 3Q13 following poor YoY numbers for two straight quarters (1Q-2Q13).  On a YoY basis, M delivered 7% more revenue, led by new outlet expansion of MK Suki and Yayoi coupled with sales price increases. Outlet expansion outweighed the effect of a slight SSS contraction. GM dipped from 67.7% in 3Q12 to 67.2% in 3Q13, due to food cost increases. The SG&A/sales ratio rose from 48.7% in 3Q12 to 50.5% in 3Q13 because of higher rental, depreciation and marketing expenses. Thus, core margin declined 20 bps YoY to 15.1% in 3Q13.
M’s profitability recovered QoQ, even though sales dipped 3%—efficiency improved during the quarter. GM rose from 66.5% in 2Q13 to 67.2% in 3Q13. The SG&A/sales dipped 30 bps QoQ. Core margin rose from 13.4% in 2Q3 to 15.1% in 3Q13.
The balance sheet was healthy at end-Sept—a net-cash position, thanks to Bt9bn in IPO proceeds in August (versus a net gearing ratio of 0.1x at end-June). 
Outlook
We expect QoQ and YoY earnings growth in 4Q13. Note that M’s profit was relatively weak at Bt430m in 4Q12. The fourth-quarter is normally the best period of the year for sales. Most importantly, M will open 30 new outlets in 4Q13 (46% of its FY13 rollout target of 65 outlets). However, we are concerned about marketing expenses during the quarter (TV advertising and a marketing campaign to boost sales in a slow consumer spending environment).
What’s changed? 
9M13 core profit represents 75% of our full-year forecast (70% of the consensus), which we maintain unchanged.
Recommendation
The market should react positively to proof of a profitability recovery in 3Q13, despite the economic slowdown. It presents an opportunity to take positions, as the share price is 7% below M’s IPO price of Bt49. Our BUY rating stands with a DCF-derived YE14 target price of Bt58 (WACC of 10.8% and 1% terminal growth rate).