MK Restaurant Group

MK Restaurant Group Plc (M)

Above expectations
M posted a core profit of Bt543m for 4Q13, up by 24% YoY and 3% QoQ. The result beat our estimate by 17% and was 6% above the consensus, mainly due to higher-than-expected other income (led by interest income).
M announced a DPS of Bt1.60 for FY13 (we had assumed only Bt1.52), implying a 3.2% yield (XD on May 6; payment on May 21).  The payout ratio was 71% (well above M’s policy rate of 50%).
Results highlights
The strong YoY earnings growth was driven by interest income from investments tied to M’s excess (post-IPO) cash. The firm had Bt5bn in a 15-month fixed deposit paying a 3.7% annual yield. Interest income jumped from only Bt5.3m in 4Q13 to Bt99m in 4Q13. Thus, other income shot up 143% YoY to Bt133m. Sales expanded 2% YoY to Bt3.5bn—TSSG of 16% for Yayoi (but MK Restaurant’s sales dipped 0.7% YoY). SSS slipped by 6% for MK Restaurant and by 2% for Yayoi. GM remained high at 67.6% (up 39 bps QoQ, flat YoY). The SG&A/sales ratio was 52.0% in 4Q13, down 0.5% but up 1.5% QoQ, due to higher marketing expenses. Core margin improved by 2.8% YoY and 0.5% QoQ to 15.6%.
The balance sheet was healthy at YE13—a net-cash position for two straight quarters, thanks to Bt9bn in IPO proceeds in August 2013.
Outlook
We expect YoY growth in the 1Q14 profit, driven by interest income. There should also be some TSSG, given branch expansion. In Jan-Feb 2014, SSS at MK Restaurant was weak, but management said Yayoi had achieved double-digit SSSG. GM should be sustained high, as the company has secured raw materials on forward contracts.
What’s changed? 
Our FY14 forecast stands unchanged—profit growth of 4%. We assume sales expansion of 9% for this year (M guides for 15%). Our model assumes that 49 new outlets will open in FY14 (management targets 55 branches).
Recommendation
Although we forecast low earnings growth for FY14, the dividend payment (we assume a 3.5% yield for FY14, including an interim payment) will support the share price. Moreover, news of new acquisitions would boost the stock, as they would mean scope for upside to profit forecasts. The clean balance sheet will accommodate a high payout ratio of 70-80%. We assume payout ratios of 75% for FY14 and 80% for FY15. Our BUY rating stands with a DCF-derived YE14 target price of Bt56 (WACC of 11.0% and a 1% terminal growth rate).