MK Restaurant Group

Investment thesis

We have upgraded our M rating from HOLD to BUY with a new DCF-derived YE15 target price of Bt64 (unchanged WACC of 10.8% and a 2% terminal growth rate) to factor in higher earnings forecasts. SSS will turn around in 4Q14 for MK Restaurant and Yayoi after a series of quarters of slippage. Higher profits could make for bigger dividend payout rates than we have modeled (annualized yields of 3.4% for 2H14 and 3.8% for FY15). The stock trades at an FY15 PER of 22.5x, a little below the global mean of 23.1x. 

SSS will turn around in 4Q14

M will post YoY SSS growth for two key brands for 4Q14—MK Restaurant and Yayoi—following consecutive quarters of SSS falls since last year. MK Restaurant’s SSS slipped during 2Q13-4Q14 and Yayoi’s SSS dived during 4Q13-3Q14 (Figure 2). MK Restaurant’s SSS turned around from a 5% YoY drop in October 2014 to growth of 4% YoY in November. Yayoi’s SSSG rose 3% YoY in Oct and 4% YoY in Nov. In Dec 2014, SSS will surely increase YoY for both MK Restaurant and Yayoi, driven by the festive season, new marketing promotions and new menus.  

Outlet expansion is on-track

The firm opened 15 new outlets in 4Q14 (8 MK Restaurants; 6 Yayois and 1 Miyazaki branch). Thus, M has rolled out 57 new outlets for FY14 (29 MK Restaurants, 19 Yayois and 9 others—mainly Miyazaki). In FY15, M plans to open 60-65 new branches (30 MK Restaurants and 20 Yayois), implying 11% outlet growth for the year. 

Expanded expectation for 4Q14 earnings 

Our expectation for 4Q14 earnings has expanded from flattish YoY and QoQ to good YoY and QoQ growth. We estimate a core profit of Bt587m for the quarter, up by 8% YoY and 12% QoQ. Sales growth of 12% YoY and 4% QoQ to Bt3.9bn is assumed, due to the SSS turnaround and new outlets. GM should rise from 65.3% in 3Q14 (down 1.9% YoY) to 66.0% in 4Q14 (66.7% in 4Q13). Core margin will be the best of the year at 15.0% for the quarter. 

Earnings forecast upgrades and potential upside to dividend payout

We have upgraded our core earnings forecasts by 2% for FY14-15, based on optimism over 4Q14 numbers. Our model conservatively assumes SSSG of 2% for both MK Restaurant and Yayoi for FY15. Core margin is expected to rise by 90 bps to 14.4% in FY15 (a one-time Bt167m provision for ESOP was set in 2Q14). There is scope for upside to the dividend payout rate (our model assumes 82% for FY14 and 85% for FY15), given M’s clean balance sheet. If the payout rate were 90%, we would expect DPSs of Bt2.0 for FY14 (only Bt1.79 in our current model) and Bt2.3 for FY15 (Bt2.17 in our current model).