MK Restaurant Group

MK Restaurant Group Plc (MK)

Investment thesis
We now model for a higher dividend payout of 70%, which will compensate for flattish FY13 earnings. M should resume profit growth in FY14 (we forecast 14%). Our BUY rating stands with a new investment horizon of YE14 and a target price of Bt58, which factors in the changes to our model and new BLS assumptions (WACC from 9.4% to 10.8%; market return from 12.4% to 12.8% and risk-free rate from 4% to 4.5%). M trades at an FY14 PER of 18.8x, 19% below the global QSR/restaurant peer mean.
Diminished earnings forecast, but …
We have reduced our profit forecasts by 5% to Bt2bn for FY13 and by 6% to Bt2.3bn for FY14 to fine-tune for a weaker-than-expected 9M13 performance. Our FY13 assumptions decline as follow—sales from 18% to 11% (9% growth in 9M13) and GM by 20 bps to 66.8%. In FY14, sales growth is now modeled at 14%; we expect a consumer consumption recovery, led by GDP growth (forecast at 4.4%). We project stable NM in FY14 (note that management guides for a fatter NM, due to greater economies-of-scale). 
…higher dividend payout assumption
M will post a low D/E ratio of 0.2x at YE13 and a net-cash position of above Bt8bn. Because our FY13 EBITDA forecast is Bt3.2bn against planned FY14 CAPEX of just Bt600m, we have increased our dividend payout assumption from 50% of net profit (the policy floor) to 70% for FY13 and from 60% to 75% for FY14. As such, our DPS forecasts jump by 33% to Bt1.54 for FY13 and by 18% to Bt1.87 for FY14, implying yields of 3.3% for FY13 and 4.0% for FY14.
To post flattish 3Q13 results
We model for a 3Q13 net profit of Bt490m, down 4% YoY and flat QoQ. Sales of Bt3.5bn are estimated, up 5% YoY, offsetting the effect of a NM decline from 15.5% in 3Q12 to 14.1% in 3Q13 (GM slippage of 1% YoY to 66.8% and higher SG&A expenses). The quarter’s same-store-sales are assumed to have dipped 4% YoY for MK Restaurant, but to have inched up 2% YoY for Yayoi. TSSG is modeled at 6% for MK Restaurant and at 28% for Yayoi, led by outlet expansion.
4Q13 profit improvement with the opening of 30 new outlets
In 9M13, M opened 35 new outlets (20 MK Restaurant and 10 Yayoi outlets). Management expects to open another 30 joints in 4Q13 to achieve its FY13 target (40 MK Restaurant and 25 Yayoi branches). Outlet expansion will boost sales growth by 18% YoY and 16% QoQ in 4Q13. Thus, earnings should resume both YoY and QoQ growth during the period following three straight quarters of YoY declines, 1Q-3Q13.  The start-up of the third distribution center has been postponed from Oct to 1Q14 in order to avoid technical problems tied to food processing during the fourth-quarter high-season.