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MK Restaurant Group

Scope for a bigger payout rate

MK Restaurant Group Plc (M)

Investment thesis

Although we model for only moderate profit growth of 14% in FY14, there is scope for upside to our dividend assumption from an increase to the payout rate. We maintain a DCF-derived YE14 target price of Bt58 (unchanged 10.8% WACC and a 1% terminal growth rate). M trades at an FY14 PER of 19.1x (against a global QSR/restaurant mean of 28.7x) with a forecast dividend yield of 3.9% (the global average is 2.6%). We expect ROE of 20% in FY14, above the global mean of 16%.

Good 4Q13 high-season earnings

Sales should be about Bt4bn in 4Q13, up by 16% YoY and 13% QoQ on seasonality and new outlets. M will open 25 new locations during the quarter (15 opened in Oct-Nov) after launching only nine new branches in 3Q13. Net margin is expected to rise YoY from the low base set by 4Q12 of 12.6% (NM was 15.1% in 3Q13). Sales expansion will boost economies-of-scale in 4Q13. MK Restaurant resumed flattish YoY same-store-sales in Oct following 4% contractions in both 2Q13 and 3Q13. Yayoi posted low single-digit SSSG in Oct.

Surplus cash likely to make for a higher payout rate

M's D/E was low at 0.2x at end-Sept and it had a net-cash position, so could easily afford a payout rate of 70-80%. There is scope for upside to the payout assumptions of both ourselves and the street. We assume payout rates of 75percent for FY13 and 80percent for FY14, which implies dividend yields 3.2percent for FY13 and.3.9percent for FY14. If the payout rates were 100%, the yields would rise to 4.6percent for FY13 and 5.2percent for FY14.

To maintain new outlet growth of 11-12% per year

The firm pared back its FY13 new outlet rollout guidance from 65 locations to 55, due to delays to the openings of shopping malls (the new MK Restaurant outlet target was cut from 40 to 34, the Yayoi target from 25 to 21). However, that downsized number would still represent growth of 11% to 540 branches in total. Management plans to open another 60 new outlets in FY14, 12% growth. By YE17, M plans to have 10 proprietary MK Restaurant outlets and 15 proprietary Yayoi branches in Singapore (it currently has one MK Restaurant and four Yayoi locations there). M has four franchise outlets in Vietnam and one in Indonesia.

Looking for new acquisition opportunity but no rush

Management plans to acquire a new brand for both domestic and regional rollout. Its parameters are: 1) the new brand must be a sizable existing operation in order to utilize M's infrastructure (a third central kitchen is slated to start running in Feb 2014), 2) it must have the capacity to expand further and 3) a hurdle rate of 15%. Thus, it may be some time before a new brand is acquired.










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