MK Restaurant Group

MK Restaurant Group Plc (M)

Investment thesis
We like M for expectations of an interim dividend announcement in August and a possible new acquisition (the timeframe is yet to be concluded). The stock trades at an FY14 PER of 23.7x versus a 31.5x of global mean. Our BUY rating stands, with an upgraded YE14 target price of Bt62 (up from Bt56) to reflect a terminal growth rate of 2%, (in line with peers; previously 1%), pegged to a DCF framework (unchanged WACC of 11.0%).
Political chaos hit M’s profit the least of the QSR operators we cover
Amid the political chaos, M’s net profit declined 3% YoY in 1Q14 against drops of 11% for MINT’s Food unit and 62% for CENTEL’s Food unit. The firm sustained a high NM of 13.9% for the quarter versus 8.4% for MINT’s Food unit and 2.0% for CENTEL’s Food unit. We forecast that 2Q14, SSS will slip by 8% YoY for MK Restaurant (MKR; down 9% in 1Q14) and by 1% for Yayoi (down 5% in 1Q14); TSS growth of 2% YoY for MKR and 13% for Yayoi. The firm will add new 10 outlets in 2Q14 (6 MKR, 3 Yayoi and 1 Miyazaki). We expect 2Q14 profit to be flattish YoY and up slightly QoQ.
To announce interim dividend
In mid August, when it releases 2Q14 results, M will announce an interim dividend for 1H14 operations. Note that at end-March, the firm had Bt4bn in cash-on-hand and a low D/E ratio of 0.15x. Assuming a payout rate of 70-80%, we assume an interim DPS of Bt0.80-0.90 for 1H14, implying to a 2.9-3.2% annualized yield. Forecast 1H14 EBITDA of Bt1.5bn comfortably covers the Bt725-815m cash outflow for the dividend. M intends to commit to a minimum absolute DPS every year with scope for upside from profit growth.
Low risk to our flattish profit forecast for FY14
Our model mostly prices in the weak economy and political chaos in 1H14—we assume only 4% sales growth for FY14 (8% FY13 growth), far below M’s guidance of 10%. We expect FY14 SSS to slip 6% YoY for MKR and to inch up only 0.8% YoY for Yayoi; TSSG of 0.7% for MKR and 20% for Yayoi, driven by outlet expansion. The firm plans to open 55 outlets in FY14 (30 MKR, 25 Yayoi). But we assume only 49 outlets (27 MKR, 22 Yayoi), of which 22 will open in 1H14.
Significant upside to earnings from possible brand acquisition
M is negotiating to acquire a new brand. It hasn’t yet said whether it is a local brand or a foreign franchise. The firm requires that it will be the majority shareholder (financial consolidation). The acquisition target is a food chain (health food) with scope to fatten margin. The brand would be able to use M’s third central kitchen. Guidance given by the firm indicates that the acquisition would add Bt1-2bn (6-12%) to our FY15 revenue forecast. The acquisition price is set at below M’s PER.