MK Restaurant Group

In line with expectations

M posted a core profit of Bt522m for 3Q14, down 1% YoY but up 30% QoQ. The result was in line with our estimate and the consensus.   

Results highlights 

The YoY slippage was because sales growth was insufficient to offset the effect of slimmer GM and higher SG&A expenses. Sales rose 7% YoY to Bt3.7bn, led by outlet expansion (19 new branches opened in 3Q14—seven MK Restaurants, six Yayoi and six Miyazaki). Core margin dipped 1.2% YoY to 13.9% in 3Q14. GM was squeezed by 1.9% YoY to 65.3%, due to higher raw material prices and costs tied to the new central kitchen that opened in March 2014. The SG&A/sales ratio rose 0.5% YoY to 51.0%. SSS for MK Restaurant dipped 1% YoY; Yayoi’s SSS fell 10%. 

The QoQ earnings growth was boosted by 2% sales expansion, a 0.7% fatter GM and a 3.1% lower SG&A/sales ratio (a Bt167m provision related to ESOP was booked in 2Q14). GM improved QoQ, as M increased its mean sales price by 4% YoY in July. The firm has maintained a net-cash position for five straight quarters.   

Outlook 

M’s 4Q14 earnings are expected to be flattish YoY but up QoQ (seasonality). A YoY SSS turnaround is likely for MK Restaurant for the quarter after six straight quarters of declines. But SSS for Yayoi will probably decline YoY. Thus, Yayoi launched a new menu and aggressive promotions to improve SSS in 4Q14. 

What’s changed?  

We have trimmed our core profit forecasts by 3% for both FY14 and FY15 to factor in weak SSS. Our sales assumptions are pared back by 1% for FY14 and by 4% for FY15. Next year, we now expect only 25 new MK Restaurants to open (previously we expected 30) and only 20 Yayoi outlets (previously 25). Besides, our SG&A/sale ratio projections rise by 1.0% for FY14 and by 0.2% for FY15, due to higher marketing expenses and promotions. Our dividend payout rate assumptions remain 82% for FY14 and 85% in FY15. 9M14 profit represents 72% of our new FY14 forecast, but only 66% of the consensus projection. 

Recommendation 

A consensus earnings forecast cut will affect sentiment toward the stock in the short-term. We suggest waiting for signs of an SSS turnaround before re-entry. A new acquisition is unlikely in the near future. The promised dividend yield (expected annualized yields of 3.3% for 2H14 and 3.6% for FY15) will support the share sharp price somewhat. M trades at an FY15 PER of 23.3x, near the global mean. Our HOLD rating stands with a new DCF-derived YE15 target price of Bt61 (previously Bt64), which reflects our diminished expectation for earnings (10.7% WACC and a 2% terminal growth rate).