MK Restaurant Group

MK Restaurant Group Plc

Investment thesis
We assume dividend yields of 3.0% for FY13 and 3.5% for FY14 (above the global peer average of 2.4%), which would support the share price. Our model points to ROE of 19% this year (the global mean is 17%). We have a BUY call, premised on M’s clean balance sheet. Our YE14 target price declines to Bt56 (from Bt58) to reflect our new forecast, pegged to a DCF framework (10.9% WACC and a 1% terminal growth rate).
4Q13 net profit expected to rise YoY, fall QoQ
Our model indicates a net profit of Bt463m for 4Q13, up 8% YoY but down 13% QoQ (slightly below our earlier forecast of Bt488m). The expected YoY growth is due to the low 4Q12 base and a lower SG&A/sales expenses ratio (from 52.5% in 4Q12 to 51.0%). The assumed QoQ decline is due to higher marketing expenses, which failed to push sales significantly. GM should have been sustained high at 67.1%. Sales are estimated at Bt3.6bn, up by 8% YoY and 4% QoQ.
Outlet expansion drove 4Q13 sales growth. The number of MK Restaurant branches rose from 354 at YE12 to 381 at YE13 (seven opened in 4Q13); the number of Yayoi branches rose from 91 at YE12 to 113 (seven opened in 4Q13). In 4Q13, MK’s SSS slipped 6% YoY and Yayoi’s SSS dipped 2% YoY. 
Earnings forecast cuts
We have trimmed our model by 1% for FY13 to fine-tune for our current 4Q13 preview and by 6% for FY14 to reflect weak consumption spending. January saw only single-digit YoY sales growth. SSS is yet to recover for MK (down 6% YoY in Jan), but Yayoi saw double-digit SSSG. We assume FY14 TSSG of 9% (below M’s target of 15%). The firm plans to open 55 outlets in FY14 (30 MK and 25 Yayoi), but we assume 49 new branches (27 MK and 22 Yayoi).
Management guides for a sustained absolute dividend payment
M has a big Bt9bn net-cash position, so could deliver a payout rate of 70-80% (75% in our FY13 model and 80% for FY14). An interim dividend payout for 1H14 operations is likely. The firm guides for a secured absolute DPS every year plus some extra when earnings growth justify a higher dividend.
Bt1-2bn allocated for a new acquisition
Management plans to acquire a new brand for both domestic and regional rollout (it may be either a standalone operation or a JV). The acquisition target is a restaurant chain. For the deal to be closed, M requires that it be the majority shareholder. The firm guides for a purchase price in the range of Bt1-2bn (depending on whether it is a JV or a 100% takeover). The acquisition would enable faster long-term earnings growth.