Brokers approve of FY22 results for Collins Foods and debate now centres around the outlook for margins in a tough macroeconomic environment.

-FY22 earnings for Collins Foods exceed expectations
-Early FY23 sales rise across all regions
-Price increases to help offset cost inflation
-Brokers debate the outlook for margins
 

Yesterday's FY22 results for Collins Foods ((CKF)) ignited a near 12% rally in the company's share price. This reaction followed a slump from an all-time high of $14.30 last November to a 52-week low of $8.04 this month.

Earnings (EBITDA) of $209.6m for the financial year exceeded the consensus forecast of $200m. Operating margins were also better than Morgans expected for both KFC Europe and KFC Australia though this was partly offset by a softer performance for the start-up Taco Bell brand.

Collins Foods, an operator of quick service restaurants (QSR), is the largest KFC franchisee in Australia and is rolling out KFCs across Germany and the Netherlands. The company also operates Taco Bell restaurants in Australia and is the franchisor of several Sizzler-branded restaurants in Japan and Thailand.

Wilsons was impressed by FY22 profit growth of 26%, despite the company cycling very strong sales growth in the previous corresponding period (pcp) and having to navigate supply chain challenges.

While no explicit guidance was provided, company management revealed same store sales growth figures by region across the first seven weeks of FY23. Australia grew by 4.1%, while Germany and the Netherlands grew by 19.4% and 12.2%, respectively.

Management expects margins for KFC Australia in FY23 to be at the low-to-mid point of historic ranges and also anticipates margin headwinds of -1-2% for KFC Europe.

During FY22, the KFC Australia earnings (EBITDA) margin fell by -40bps on the prior year. Going forward, Outperform-rated Macquarie believes menu price increases will help offset margin headwinds from rising costs.

Neutral-rated Jarden is less sanguine than Macquarie (and management) and doesn't believe margin compression will abate in the second half of FY23. It's felt a large portion of increased costs, such as higher wages and input costs, are permanent in nature.

Jarden cites the chicken contract, which is up for renewal at the end of 2022, where the full effect of any price rise will be seen in the second half of FY23 and in FY24.

Post the results release, Morgans has upgraded its rating to Add from Hold and expects consumer demand will remain resilient. It's also thought the company will exhibit a degree of pricing power to help mitigate inflation in the year ahead.

Morgans forecasts positive same store sales growth in FY23 and believes some consumers will 'trade down' to KFC from more expensive QSR options. An increased focus on promotional offers to drive transactions is also expected.

Additionally, UBS expects an incremental boost from KFC's launch around Uber Eats in Queensland, which will be rolled out nationally in coming months.

A final dividend of 15cps was declared, coming in above the 12.5cps from last year. Current broker forecasts in the FNArena database indicate a forward-looking dividend yield for FY23 and FY24 of 2.8% and 3.1%, respectively.

Outlook

As rising inflation and interest rates are likely to slow consumer spending, Macquarie prefers Consumer Staples over Consumer Discretionary in the retail space, though notes Collins Foods is well placed as a low-cost option for consumers during price sensitive times.

UBS concurs and points out KFC has the highest customer value score of all the Australian QSR players. It's felt a pricing gap between McDonalds' $10.85 Big Mac meal offering and KFC's $9.95 Zinger meal allows room for additional price increases.

There has already been a price increase this month and management suggests one more is likely before the end of 2022 to help partially offset further cost inflation from the poultry contract renegotiation.

However, UBS alludes to several moving parts impacting upon the FY23 earnings outlook, in particular the expectation for moderating cost pressures in the near term. Bearing in mind this uncertainty and the share price jump following the release of FY22 results, the broker maintains its Neutral rating.

The FNArena database is updated daily for seven brokers, but only three of those cover Collins Foods. These consist of two Buy (or equivalent) ratings and one Neutral rating, while the average target price of $11.10 suggests 10.8% upside to the latest share price.

Outside of the database, Jarden has a Neutral rating and increased its target price to $10.55 from $9.48, while Overweight-rated Wilsons reduced its target to $12.30 from $13.45.

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