MK Restaurant Group

Investment thesis

Despite share price slippage during the past few months (down 10% since our rating cut on August 13), we suggest waiting for signs of an SSS turnaround before re-entry. A new acquisition is unlikely in the near future. The promised dividend yields (expected annualized yields of 3.5% for 2H14 and 3.8% for FY15) will support the share sharp price somewhat. M trades at an FY15 PER of 22.3x, near the global mean. Our HOLD rating stands with a DCF-derived YE15 target price of Bt64 (10.8% WACC and a 2% terminal growth rate).

SSS likely to underperform peers 

M’s YoY SSS slippage has eased from 9% in 1Q14 to YoY to 6% in 2Q14 and 1% in 3Q14, led by MK Restaurant, for which a big-spend marketing campaign was launched in August. However, Yayoi’s YoY SSS fall has deepened from 5% in 1Q14, to 8% in 2Q14 and 10% in 3Q14. M’s SSS performance lags its peers, who saw SSSG expansion in 3Q14—4.9% for CENTEL’s QSR unit and 1.2% for MINT’s QSR unit. TSSG for the quarter was 7% for MK Restaurant and 4% for Yayoi against TSSG of 13% for CENTEL and 14% for MINT. 

Expect persisting weak numbers for 3Q14

We estimate a core profit of Bt496m for 3Q14, down 6% YoY, but up 23% QoQ. Sales growth of 6% YoY and 1% QoQ to Bt3.7bn is assumed, due entirely to outlet expansion. In 3Q14, M added 19 new outlets—seven MK Restaurants, six Yayoi branches and six Miyazaki branches. GM should improve from 64.5% in 2Q14 (down 1.9% YoY) to 67% in 3Q14 (67.20% in 3Q13), as M increased its mean sales price by 4% YoY in July. The sales price rise is expected to offset the effect of higher costs this year (no sales price rise in 1H14).  

Hope for SSS turnaround in 4Q14 festive season

4Q14 is normally high season for restaurants. A YoY SSS turnaround is expected in 4Q14 for MK Restaurant after six straight quarters of declines. Furthermore, Yayoi launched a new menu and promotions to improve SSS in 4Q14. Thus, M should resume YoY and QoQ earnings growth for the quarter. 

Earnings risk remains

We see risk to our FY14 profit forecast of about 4% because consumption spending remains stubbornly weak and M has downsized its FY14 new outlet rollout plan from 64 to 58 (30 MK Restaurants; 18 Yayoi branches and 10 Miyazaki branches). We currently assume 27 new MK Restaurants and 22 Yayoi branches in FY14. There is even more downside risk to the consensus earnings forecast (our model is 4% below the street number). Despite the bottom-line uncertainty, the balance sheet is healthy with a low D/E ratio of only 0.2x.