This article first appeared in The Edge Malaysia Weekly, on November 30 - December 6, 2015.

MALAYSIANS seem to love coffee. They have not stopped patronising Starbuck outlets although consumer spending is softening. Between May and October, the coffee chain’s same store sales growth (SSSG) was at a high of 12%. In fact, Berjaya Starbucks Coffee Company Sdn Bhd (BStarbucks), a wholly owned unit of Berjaya Food Bhd (BFood) and operator of the coffee chain, holds the Starbucks record worldwide of posting double-digit SSSG for five consecutive years.

CEO Datuk Francis Lee tells The Edge that BStarbucks is targeting annual revenue growth of 15% to 20% year on year (y-o-y). “For FY2016 (ending April 30), we are aiming to achieve a turnover of RM550 million to RM600 million, making us the largest listed F&B company in Malaysia,” he says.

“Based on the (current) sales record, Starbucks is performing very well. We expect the (performance) in the second half of FY2016 to be better than in the first half as December (is a) fantastic month for us, especially during the period from Christmas Eve to New Year’s Eve,” Lee says.

BStarbucks, which became a wholly owned subsidiary of BFood in 2QFY2015, is currently its key earnings driver. “BStarbucks will be the star performer of the group,” says Lee. BFood expects the leading gourmet coffee chain to contribute 80% of the group’s total sales going forward.

“For the full financial year ending April 30, 2016, our turnover should be double last year’s RM376.78 million. Starbucks should contribute about RM400 million,” he says.

As at Oct 31, BFood (fundamental: 1.15; valuation: 2.10) had 203 Starbucks outlets nationwide, 25 of which have drive-through facilities. To stay ahead, Lee says, BFood will open at least 25 new stores in the next five financial years.

He adds that the group will focus on opening new drive-through outlets as they fetch better margins than those located in retail malls. “We try not to be too dependent on new openings in retail malls as rental rates are revised every three years. We are suffering (from this) and it puts pressure on our selling prices.

“Furthermore, all our drive-through outlets are profitable. On average, each outlet generates monthly revenue of RM250,000 while those in retail malls bring in RM130,000 to RM140,000,” he says, adding that the expansion plan will be funded through the cash it generates from business operations.

Despite the mushrooming of competing coffee chains, Lee thinks it is not easy for them to grab Starbucks’ market share. “It is very difficult for them to overtake us; we are already in most places. They cannot afford to lose money trying to surpass us in number of stores.”

Lee says although the strengthening of the US dollar has increased operating costs, it has been offset by the stronger sales generated by all outlets.

However, despite the coffee outlets’ brisk sales and impressive topline growth, BFood’s net profit has not grown at the same pace. Indeed, the group may have been affected by the current slowdown in consumer spending.

BFood’s revenue surged 234% to RM132.41 million in the first financial quarter ended July 31, 2015 (1QFY2016) from RM39.64 million last year. However, net profit was almost flat at RM6.11 million versus RM6 million in 1QFY2015.

Hence, it is not surprising that its share price has dipped 19.3% year to date. The stock hit a low of RM1.97 in August before regaining some ground. It bounced back to a high of RM2.61 on Nov 12 and closed at RM2.50 last Thursday.

Besides BStarbucks, BFood owns Berjaya Roasters (M) Sdn Bhd, Jollibean Foods Pte Ltd and Berjaya Jollibean (M) Sdn Bhd. It has a total of 372 stores — 296 in Malaysia, 23 in Indonesia, 49 in Singapore, one in Cambodia and three in Brunei.

Lee notes 2015 will be a challenging year, especially with the imposition of the Goods and Services Tax. The tax has weighed down Kenny Rogers Roasters (KRR), which is facing stiff competition as well. “KRR is well known as a family restaurant. Families and the middle-income group are among the categories most hit by GST, which is eroding their spending power,” he explains.

Following the implementation of GST, Lee says the SSSG of KRR for the rolling six months through October declined 14% from the previous corresponding period. However, he remains optimistic about the full-year results, saying that sales will still grow but at a slower pace.

In view of this, Lee says, the group is careful about expanding KRR and will open seven to eight new stores in FY2016 compared with previous years’ 10 to 12.

Although its Indonesian and Singapore operations were loss-making in FY2015, Lee expects business to improve within two years.

“For the Indonesian business, we closed seven to eight stores last year, and the stores that are in operation now will not affect our cash flow. We will give it some time to nurture and will do more branding and promotions to attract customers,” he says.

Lee says the group has appointed a new CEO to revive the operations in Singapore. Jollibean sank into losses last year, mainly owing to over-expansion. “The new CEO has done a few good things, opening up several profitable stores, and we will give her 18 months to turn the business around,” he adds.

As at July 31, 2015, BFood had total debt of RM182.34 million, mainly owing to its acquisition of the remaining 50% stake in BStarbucks from Starbucks Coffee International Inc (SCI) for RM279.5 million cash in July 2014.

Lee says the company had made repayments totalling RM101.2 million between October 2014 and July this year, paring its debt to RM182.34 million. “We plan to repay all our debt in four to five years. We cannot have a heavy burden, or we’d have to pay a lot of interest.”

He expects the company to be in a net cash position after that. “In simple terms, we will allocate one-third of our cash flow for business expansion, another third for dividend payment and the remainder for debt repayment,” he says.

When asked if BFood intends to make a cash call to pare its borrowings, Lee replies in the negative, adding that it would put more pressure on the shareholders.

“Furthermore, the market is not good now and nobody (wants to subscribe for a rights issue). As long as I generate profit and cash from my operations, (there is) no need to raise cash from shareholders,” he stresses.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

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