not vested
Yum! Brands May Not Get A Lift Even After The China Spinoff By Shuli Ren
Bloomberg reported that Yum! Brands (YUM), the owner of KFC and Pizza Hut, is in advanced preparation to spin off its China business.
Yum last week added activist investor Keith Meister of Corvex Capital to its board after posting disappointing third-quarter same store sales in China. Meister has suggested Yum could boost its worth by $16 a share by spinning off its China business.
Goldman Sachs disagrees. Using sum-of-the-parts analysis, the bank estimates that investors are paying 5.6-6.9 times earnings for Yum’s China business. On the top end of its estimated range, this valuation is hardly below Yum’s Chinese peer average of 7 times.
Analyst Karen Holthouse and team wrote:
1) We estimate KFC/PH/TB refranchising proceeds would total $3.4bn on an aftertax basis.
(2) We estimate KFC and PH are worth $14.3bn-$15.4bn in enterprise value, which accounts for compression in the peer (QSR/DNKN/DPZ) multiple, slower top-line growth, and greater exposure to macro risks in S.E Asia, South America, and the Middle East.
(3) We estimate Taco Bell is worth $4.5-$4.9bn, which accounts for a top-line starting to decelerate against tougher compares.
(4) This implies investors are paying 5.6x-6.9x EBITDA for China vs. a Chinese peer average of 7.0x. While this appears inexpensive vs. US multiples, we struggle to determine a proper discount for the volatility/lack of
Goldman has a price target of $66 and Sell rating on Yum.
Credit Suisse is more optimistic, seeing Yum to trade as high as $82 per share, but on the premise that Yum spins off its China business AND buy back stocks with borrowed debt. “The valuation upside created by a potential separation is largely due to the leverage that would be added to the franchise company,” acknowledged analyst Jason West and team.
Yum closed at $71.71 on Monday.
Source: Barron's Asia