MK Restaurant Group

MK Restaurant Group Plc  

 

Investment thesis

We have cut M to HOLD from BUY, with a DCF-derived YE16 target price of Bt60/share (9.2% WACC and 2.0% terminal growth rate). Earnings risk emerges after a big fall in same-store sales (SSS) at MK and Yayoi restaurants in 3Q15. It is unlikely to recover in the short term. The consensus will share our view of an earnings cut (approximately 10%) and the unattractive profit profile for 2H15 and FY16. However, the stable dividend payment would mitigate a sharp price shortfall. M trades at a FY16 PER of 24.6x, above the 22.7x of the global mean.  

Negative surprise in SSS …

Disappointing us and the market, SSS for two key brands has significantly dropped YoY in Jul-Aug. YoY SSS for MK dropped 5% in July, a drop of 17% in August and a double-digit drop in September. Yayoi’s SSS turned to a dip of 1% YoY in July and dropped 10% in August against YoY growth during 4Q14-1Q15. The rationales behind the weak SSS are weak consumption and high food competition. 

… prompts an earnings forecast cut

We have cut our core profit forecast 12% to Bt2.0bn for FY15 and 17% to Bt2.2bn for FY16. Modeled sales are revised down 10% for FY15 and 13% for FY16 to reflect SSS cuts (from FY15 SSSG of 2.0% for MK to an SSS drop of 6.0% and from SSSG of 2.0% for Yayoi to SSSG of 0.5%: FY16 SSS contraction of 1.0% for MK and SSSG of 1.0% for Yayoi). New outlets for 2015 are 17 for MK and 13 for Yayoi, amounting to a 4% outlet expansion for MK and 10% for Yayoi. We have cut our core margin assumption by 0.4% to 13.9% for FY15 (14.1% for FY16) to incorporate a slimmer GM and a higher SG&A-to-sales ratio. Our new model suggests flattish earnings for FY15 and only 5% growth for FY16. 

Poor 3Q15-4Q15 earnings outlook 

We estimate core profit will be Bt420m for 3Q15, down 20% YoY and 19% QoQ. SSS is expected to decline 11% YoY for MK and 3% for Yayoi, leading to a 5% total sales slippage to Bt3.6bn. Core margin is expected to drop 0.8% YoY to 11.0% because of a weak top line. SSS is unlikely to recover in 4Q15, particularly for MK, which is 86% of total revenue. Thus, 4Q15 profit is expected only YoY flattish despite greeting season. M plans to increase selling prices in 4Q15 to mitigate its poor sales volume, but the price increases are only 1-2% YoY versus 4% in FY14. 

Unaffected dividend payment in medium term

Despite its unattractive earnings growth profile for 2H15 and FY16, the ability to pay a dividend has yet to be negative impact because of the firm’s clean balance sheet. M will maintain Bt8bn excess cash on hand and net-cash. We seek a final DPS of Bt1.0 for 2H15’s operations at an 85% payout rate for FY15 (a 1.7% simple yield and a 3.4% annualized yield) and Bt2.16 for FY16 based on a 90% payout rate (3.7% yield).