We suggest waiting for signs of an SSS turnaround before re-entry—potentially in 4Q14. There is downside risk to the current consensus earnings forecast (our FY14 projection is 12% below the street). M currently trades at a stretched FY15 PER of 27.2x (near the global mean). Our HOLD rating stands with a DCF-derived YE15 target price of Bt64 (10.8% WACC and a 2% terminal growth rate).
SSS decline in the face of SSSG among peers
In 2Q14, MK Restaurant posted SSS slippage of 6% YoY and Yayoi of 8% YoY in the face of SSS turnarounds for peers (SSSG of 1.5% for MINT’s Food unit and 0.3% for CENTEL’s Food unit). For July, management guides for YoY declines of 3% for MK Restaurant and about 10% down for Yayoi (a high base was set by last year). We expect both MINT and CENTEL to post SSSG for July. M’s SSS might not turn around till 4Q14 high season.
Price rise to offset cost increases
Effective July, M increased its mean sales price by 4% YoY, which will offset the effect of higher costs this year (no sales price rise in 1H14). That should make for fatter QoQ GM of about 66% in 3Q-4Q14 following GM slippage of 1.9% YoY to 64.5% in 2Q14.
2H14 earnings are expected to be flattish YoY and up HoH
We conservatively assume FY14 sales growth of 4%, below M’s target of 7%. 2H14 profit looks set to be flattish YoY and up 22% HoH (a very low base was set by 1H14), led by a higher mean price and outlet expansion. 3Q14 profit will fall YoY but rise QoQ. M should resume YoY and QoQ earnings growth in 4Q14 high season. The firm plans to open 23 outlets in 2H14 (21 MK Restaurant, 13 Yayoi and seven other brands). M intends to open 55 outlets in FY14 (35 MK Restaurant; 20 Yayoi). But we assume only 49 outlets (27 MKR; 22 Yayoi).
We expect a final DPS of Bt1.0 for 2H14 (an 86% payout rate), implying a 3.2% annualized yield (XD and payment in May 2015). The payout rate might beat our assumption—we forecast a YE14 net cash position and a low D/E ratio of 0.2x. M intends to commit to a minimum absolute DPS every year with scope for upside from profit growth.
No rush for new acquisition
Management plans for new acquisitions to drive long-term earnings growth, but the acquisitions would have to adhere to strict parameters to qualify. M must be the majority shareholder (financial consolidation). The acquisition target must be a food chain and able to utilize M’s central kitchen. The acquisition price is set at a low PER of about 15x. Deal size is set at Bt200m-2bn (1-12%).