(April 23, RM7.98)
Maintain outperform at RM7.98, fair value at RM9.63: KFCH has entered into a sale and purchase agreement with Johor Land Bhd for the acquisition of a two-acre (0.8ha) piece of land (which forms part of an 8.1 acre piece of commercial land) in Bandar Dato Onn (BDO), Johor Bahru, for a cash consideration of RM5.9 million, which will be funded by internally generated funds.
The purchase of the land is for the construction of four outlets consisting of KFC, Pizza Hut (under QSR), Kedai Ayamas and Rasamas. The land is situated in the commercial area of BDO and is situated nearby BDO and other mature townships (such as Taman Daya, Taman Kempas Indah, Seri Austin, Setia Indah, Taman Adda Heights and Desa Tebrau).
Despite being a related-party transaction, which conjures negative sentiment, we believe the purchase consideration, which translates to about RM68 psf (a premium to KPJ’s recent acquisition of land at RM50 psf in Plentong), is fair as the land is located closer to Johor Bahru and benefits from nearby growing and mature townships. Furthermore, the present market value of the property is RM6.3 million, according to independent property valuer, KGV Lambert Smith Hampton.
We are overall positive on the deal given that BDO and its surrounding townships is a populous area, with an estimated resident population of more than 132,800. Furthermore, the land is sited within the BDO commercial area, which is also located nearby the JCorp Office and Paramount College, which are currently under construction, as well as the yet to be constructed police station and mosque.
Risks: bird/swine flu outbreak; escalation of corn and soybean prices, which would eat into margins; and deteriorating consumer spending power, resulting in lower same-store sales growth.
No change to our forecasts as we have already projected capital expenditure of approximately RM90 million for FY10 ending Dec 31, which have assumed 58 new stores to be set up in the current year.
No change to our fair value of RM9.63 based on unchanged 12.5 times FY10 EPS. We believe on-going promotions will help boost KFCH’s same-store-sales growth going forward, while its aggressive new store expansion strategy would help strengthen its presence in the country and enable KFC to maintain its strong market share. Maintain outperform — RHB Research Institute, April 23
This article appeared in The Edge Financial Daily, April 26, 2010.