by winston » Mon Jul 27, 2009 7:51 am
Fast-food slowdown
Benjamin Scent, The Standard HK
Monday, July 13, 2009
Cafe de coral holdings (0341) has a number of advantages over its fast-food rival Fairwood Holdings (0052) that have allowed it to perform better in the poor economic environment, analysts said.
But they warned, both companies should have posted better results, and each will face challenges in the coming year.
Cafe de Coral, the world's biggest publicly listed operator of Chinese fast- food restaurants, said on Wednesday its full-year net profit rose 5.1 percent to hit an all-time high of HK$441.87 million as Hongkongers opted for cheaper grub.
Smaller rival Fairwood announced on Thursday its net profit had plunged 20.8 percent over the same period on higher rental charges, surging food costs and a bungled coupon campaign.
"The business model is more or less the same," 3V Capital analyst Stanley Chan said. "[But] the scale is totally different."
Cafe de Coral operates 580 restaurants in Hong Kong, the mainland and North America, including 148 fast- food restaurants in the SAR, and it targets to run 1,000 restaurants within five years.
Fairwood operates 111 restaurants, including 94 fast-food outlets in Hong Kong.
Chan added that Fairwood's turnover would have actually been higher had it not introduced a coupon campaign after the financial crisis hit.
"I think Fairwood made a mistake on aggressive promotions at that time," he said. "They overreacted to the market conditions at that moment."
Average spending per person at Fairwood restaurants inched down 0.7 percent to HK$27, from HK$27.20 the year before.
At Cafe de Coral, average ticket value rose 3 percent to HK$30. ICBC International analyst Carrie Chan said Cafe de Coral has been able to grab more of the customers who are trading down from higher-priced meals.
"In terms of the brand equity, I think Cafe de Coral's brand is more well- recognized," Chan said, adding: "The difference in average selling price is reflected in the brand."
Fairwood has actually been hurt by the trading-down phenomenon, as some of its customers have been deciding to cook at home instead of eating out at Fairwood, she said.
After the results announcement, ICBC International downgraded Fairwood to "hold," from "buy," and reduced its target price on the stock to HK$8.10, from HK$9.10. Chan said Fairwood missed her earnings forecast by 11 percent.
ICBC International lowered its earnings forecasts for Fairwood for the next two years by 10 to 11 percent.
It forecast Fairwood will be able to grow its profits at a compound annual growth rate of 17 percent over the next two years.
3V Capital's Chan said he hopes Fairwood's margins will improve this year after it introduces operating efficiencies already in use by Cafe de Coral. Fairwood will launch operations of a central kitchen in Tai Po in September.
Cafe de Coral's net profit margins are now around 9.4 percent, compared to just 5.5 percent for Fairwood.
Chan said he thinks Fairwood will try to do a lot this year to lower its operating costs.
Fairwood will try to lower rental and food sourcing costs to better compete with Cafe de Coral, although it is unlikely to cut staff or reduce salaries, Chan said. Although Cafe de Coral's results were better than Fairwood, analysts said it should be doing better.
CLSA analyst Paul Quah said Cafe de Coral's earnings were about 10 percent lower than expectations.
"It appears the disappointment relates to much slower net new stores and higher-than-expected expenses," Quah said. "It suggests management has not been able to take advantage of a weak property market to aggressively open more stores, as it had hoped."
Cafe de Coral's net profit margin fell to 9.4 percent, from 9.6 percent the year before.
"Cafe de Coral did not manage to reap the benefits of lower food prices, a freeze in wages and the opportunity to negotiate for lower rents," Quah said.
Higher set-up costs for Cafe de Coral's new processing plant in Guangzhou may be another reason for the margin drop, he said. Quah warned that Cafe de Coral's defensive investment thesis is under threat.
"The company's 'value food proposition' is not economically as resilient as expected," he said.
BOC International analyst Ashley Cheung, who has a "buy" call on Cafe de Coral shares, lowered his target price by 4 percent to HK$17.30, from HK$18.10. He lowered his 2010-11 earnings forecasts by 8 percent.
Cafe de Coral's sales growth did not accelerate because the effects of the financial crisis prevented its newly- opened stores from quickly ramping up business, Cheung said.
Sales at the newly-opened outlets may not reach sufficient scale until the economy stabilizes in 2010, Cheung warned.
He forecast same-store sales growth of 3 percent year-on-year for each of the next three years. Earnings per share should grow at a compound annual growth rate of 15 percent for 2010-2012, he said.
DBS Vickers downgraded Cafe de Coral to "hold," from "buy," and kept its target price of HK$16.40.
Analyst Alice Hui cut her earnings forecasts for Cafe de Coral by 8 to 10 percent after lowering her margin expectations.
The coming year will "remain challenging" for both Fairwood and Cafe de Coral, ICBC International's Chan said.
"If the economic slowdown continues, then we will continue to see customers trading down [and] there may be some pressure on the pricing strategy," she said. "Maybe the average spending per head will continue to decrease."
Although Cafe de Coral's execution is better, Chan said she does not see much upside for the stock. It is already trading at 16 to 17 times earnings, compared with its historical average of 18 times, she said.
"There is limited upside," she said.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"