Sunday, October 30, 2011

KFCH. Finger lickin' good?

What attracted me to this company is the India growth story.

This market has its own uniqueness because of a big majority of them are vegetarian, no-no to beef, very diverse cuisines and fast food is considered as “junk food”. Eating out begins to get popular because of urbanization. People begin to accept eating out because lack of time. The targeted market segment is middle upper class.

A lot of eateries are run by mom-and-pop shop just like many Asian countries. Modern fast food chains begin to gain tractions when Darshini, Food Court as well as international chains like KFC, McDonald, Barista Coffee begin to become popular with office goers and students. For more detail you can read this in Wikipedia here

McDonald has about 170 outlets and KFC is lagging behind, 105 outlets only. KFC entered the Indian market in the early 90s after the economic liberalization policy. McDonald entered the market later, in the mid 90s by joint venture with two local companies, Hardcastle Restaurants Pvt. Ltd. and Connaught Plaza Restaurants Pvt. Ltd.

Judging from a big market with almost 1 billion people, the number of outlets are way too small. The growth rate has been very slow though the growth potential is enormous. I don’t have all the information on year by year growth evolution, so I will have to go for simple average. Average store opening/year for McDonald is 11 and KFC was even more pathetic, 5 only. It takes a long time for them to breakeven – some say 10-14 years but some say you need about 30-40 outlets to breakeven.

Let me go back to KFCH. Based on a research report by RHB research, the average revenue per outlet for an outlet in Malaysia is about RM 3.5 million but in India is only about RM 600 k. Geez ….. tough market. Indian market has always been tough, perhaps even tougher than China market. They crushed prices down to the ground with Nano Tata car, less than US $ 50 tablet, etc. I certainly do not want make a mistake by projecting the same revenue per outlet in Malaysia to Indian market.

KFCH has about 10 outlets there and here are their growth targets

end 2011 – 15 to 17 outlets
2012 – 25 outlets
2013 -30 – 35 outlets

Judging at their aggressive target, I would think KFCH will not be a dividend yield play but rather a growth play. KFCH’s EPS has been growing at the rate of 9-10%. I think we are looking at about 0.20/share for 2011. If we are willing to roll over the valuation to 2012 which is about 0.22 and peg it at about 15X PE(since contribution from India is negligible), the stock worth about RM 3.3/share - RM 3.5 with dividend yield of about 1.6 ~ 1.7%.

Guys, gals, time’s up. I got to go bed now because I will need to wake up very early to catch a flight to middle kingdom. I will be there for a week which means I will not be able to post anything. Take care.

Disclosure: None


Gark said...

If you go and visit McDonald's and Pizza Hut in India, the best selling product is their vegetarian food. In fact McD and Pizza hut have no beef or pork products at all. Their menu is almost 70% vegetarian and the taste is not bad.

McD and Pizza hut has been a massive success story in India. But can KFC adapt as well?

Vegetarian fried chicken anyone?

Kris said...

I wonder how is the price per meal? Surely meat cost more than vegetable..How to encourage them to pay a premium to vegetarian fast food..

Well, i go to KFC just for the chicken and McD for its burger.