MK Restaurant Group
Set plate aside to await better signals HOLD
MK Restaurant Group Plc (M)
Investment thesis
Our HOLD rating stands on M, with a DCF-derived YE16 target price of Bt55/share, based on a 9.0% WACC and a 2.0% terminal growth rate. We forecast uninspiring FY16 earnings growth of 6%, but a good yield at 3.8%. M trades at a FY16 PER of 24.4x, below the 26.4x of its long-term mean since its IPO in 2013, discounted to the 25.6x global mean. We suggest that investors await signs of positive SSS and earnings before re-entry.
Business plan for FY16 unveiled
Its revenue growth target is 7-9% for FY16, consistent with our model of 7% growth. SSS is targeted at 3% YoY for MK Restaurant and Yayoi followed by 6% SSS slippages in FY15 for both outlets. However, the management suggested that an only 1-2% SSSG in the full year is acceptable due to the weak consumption rates in Thailand. In FY16, 20 new outlets are planned for MK Restaurant (16 opened in FY15), and 25 for Yayoi (12 in FY15). New outlets for MK Restaurant are in line with our model, but we take a conservative view of 15 new outlets for Yayoi. Our modeled SSS in FY16 is rated at a conservative 0.1% contraction for MK Restaurant and a 1.0% growth for Yayoi.
Adding new central kitchen to reduce merchandise outsourcing
M has set up a new subsidiary, International Food Supply Co., Ltd. (IFS) with registered capital of Bt100m at Navanakorn Industrial Estate. IFS runs an additional central kitchen to produce Chinese steamed dumplings and buns, and tonkatsu for internal use instead of outsourcing the materials. The kitchen will start its commercial run in 2H16 and has BOI tax privileges. Its maximum capacity is Bt200m in sales but M plans to produce Bt100m for internal use and the rest for sale to third parties. The kitchen will reduce total outsource material purchases by 3% and will benefit M in terms of quality control, lower labor costs and manageable GM. There is scope for earnings upside if M were to supply products from the new kitchen to third parties.
Reaffirmed stable dividend payment
Management intends to maintain a high dividend payout ratio in order to sustain its dividend payments. Most importantly, the ability to pay a dividend has yet to feel a negative impact due to its clean balance sheet (Bt9bn excess cash at YE15 and net-cash). We assumed a 93% payout rate for FY16 implying a full-year DPS forecast of Bt2.01, a 3.8% yield and 95% for FY17 or a DPS forecast of Bt2.22, 4.2% yield.
No rush for new acquisitions
The excess cash urges M to acquire new brands. However, any new deals are unlikely in the medium term, it said. The key criteria for new acquisitions are that they are sizeable (Bt2-4bn of sales), have a 10% return on investment, operating assets with potential expansion, and a reasonable price. Management said it was in no rush for new acquisitions.
