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CKF - Collins Foods

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System

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Collins Foods is a major restaurant operator in Australia. It is the:

  • Operator of 117 KFC restaurants in Queensland and two in New South Wales and is Australia's largest KFC franchisee by number of restaurants.
  • Operator of 26 Sizzler restaurants in Queensland, Western Australia and New South Wales.
  • Owner of Sizzler trademarks in Australia and more than 68 other countries (Excluding the United States, Guatemala and Puerto Rico.)
  • Franchisor of 59 Sizzler restaurants in Asia, predominantly located in Thailand, Japan and China.

http://www.collinsfg.com.au
 
Despite its problem, I think this stock is over sold and now cheap according to my calculation

I take a conservative view they earn 10.5m and earning increase with inflation that sit around $1.50 and I factor in various scenario for a good margin of safety.

On that note I bought 20,000 shares today :)
 
Interesting.

Management either lied or is completely incompetent. In consumer business like this it's pretty hard to get your numbers that wrong. Not only that but revenue has fallen 1.2% and profit halved, yest management has said the profit slide was because of tough trading conditions; a 1.2% fall doesn't look that tough.

My own feeling on this one is that the numbers were being "adjusted" for an IPO (it was private equity afterall). Now that it has listed we are seeing how profitable the business really is. I'd rather own Yum! than a franchisee. Personally, I wouldn't pay more than about ~6x earnings.

Good luck ROE.:)
 
McLovin said:
Interesting.

Management either lied or is completely incompetent. In consumer business like this it's pretty hard to get your numbers that wrong. Not only that but revenue has fallen 1.2% and profit halved, yest management has said the profit slide was because of tough trading conditions; a 1.2% fall doesn't look that tough.

My own feeling on this one is that the numbers were being "adjusted" for an IPO (it was private equity afterall). Now that it has listed we are seeing how profitable the business really is. I'd rather own Yum! than a franchisee. Personally, I wouldn't pay more than about ~6x earnings.

Good luck ROE.:)
Click to expand...

I feel private equity dress it up to sell it but now inflated price is out of the way
it time to pound :)

I can tell you these business are very profitable..... I know people who has these franchisee, once you have one you buy as many as you can.

You rarely see a family who own 1 maca or 1 KFC franchise.
It definite logic these are not highly profitable if the family want more and more of it

Now compared to YUM!, who are these people? do they know people who owns
these franchise or just some analyst reading a few number :)

YUM! is no doubt a good business but I don't think owner of these franchise is any worse off in fact I reckon the franchisee has better operational leverage..

YUM! take a cut of the sale, owner keep the rest ...so for every dollar increase in sale to franchisee YUM! takes extra 8-10% the owner take extra 20-30%

Now who better to Judge KFC than the Copulos Family who owns 50 of these Franchisee in NSW :) ..they just bought a 5% stake in CKF..

I reckon it's a magic combination having Copulos Family as substantial holder

One Control the largest KFC in QLD the other in NSW together I'm sure they know how to drive sales.

At this price the down side seem pretty damn good compared to the up side
 
I love your simple and compelling logic ROE. And I tend to agree that at the current price there is very little downside. How will you know if you are wrong? Will another profit downgrade impact your analysis (they always seem to come in pairs...)?
 
I've had a closer look at this (I was a bit hasty in my first look). It certainly does look cheap. I'm not quite ready to jump in though, these sort of things usually provide ample time to take a position. So I'll let the market digest (pardon the pun) the news and see if things pick up. I'm a little dubious about the margin deterioration.
 
robusta said:
Starting to see why ROE likes this stock, picked up some today at $1.055

Here is a article in the Courier

http://www.couriermail.com.au/busin...ry-to-share-pain/story-fnbdkrr9-1226321601307
Click to expand...

LOL im in today at $1.06 ~ as there were 22 thousand shares in the que in front of me at $1.055 and it was 3PM so i figured what the hell and paid the extra half a cent.

Lots to like about this business....floated 9 months ago at $2.50 then smashed soon afterwards due to a profit warning and the uncertainty of the prospectus financials as a result of that...thieving private equity bastards. :rolleyes:
~
 

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I was wonder, what if anything, as a franchisee can you do to arrest a sales slide? The options seem way more limited as you have less control over the product and its delivery, you effectively have to bow to a master who owns the brand. Short of restaurant re-furbishments, and let's face it, these won't help much, I think they have to wait for margin recovery and consumer sentiment to pick up.
 
What they need is focus so hopefully after a year of listing and various distraction
and a few bad things going their way they will be able to focus...

at this price you don't really need to drive growth but maintain profitable shop and pay 50% out as dividend.

and fast food and burger joins tend to keep pace with inflation very well...

that all I'm after :D
 
So_Cynical said:
LOL im in today at $1.06 ~ as there were 22 thousand shares in the que in front of me at $1.055 and it was 3PM so i figured what the hell and paid the extra half a cent.

Lots to like about this business....floated 9 months ago at $2.50 then smashed soon afterwards due to a profit warning and the uncertainty of the prospectus financials as a result of that...thieving private equity bastards. :rolleyes:
~
Click to expand...

About time you, ROE and me ended up in the same stock, seems to be unloved by almost everyone else, this in a strange way gives me extra confidence.
 
Ves said:
I was wonder, what if anything, as a franchisee can you do to arrest a sales slide? The options seem way more limited as you have less control over the product and its delivery, you effectively have to bow to a master who owns the brand. Short of restaurant re-furbishments, and let's face it, these won't help much, I think they have to wait for margin recovery and consumer sentiment to pick up.
Click to expand...

They actual can set their own prices (with limits) and buy their own stock as long as it meets YUM requirements...and they can do their own "local" advertising and of course have control of probably the biggest single cost component labour.

CKF is a punt on the economic robustness of QLD and the desire of Queenslander's to continue their love affair with the Colonel's particular take on fried chicken...its a proven business in a growth state, its just that at the moment people are spending more conservatively and clearly the prospectus forecasts were at the very upper end of expectations.

robusta said:
About time you, ROE and me ended up in the same stock, seems to be unloved by almost everyone else, this in a strange way gives me extra confidence.
Click to expand...

What a surprise i got when i searched for the CKF thread to post my entry :) very surprised to see you had posted before me but happy we can share our "journey" together...and in on the same day, im just hoping this is one of the 3 out of every 5 first entry's that i get right...as i would love to turn this trade around in a month or 3, one good ann should do it.
 
How much of the price movement is due to the "professionals" hoping to get this one off their books before they have to tell anyone?? Much prefer Allan Gray (formerly Orbis) buying this one as they are contrarian and have plenty of conviction on this one - having bought 18% of all stock in the past few months..

Even if things really go to the dogs is KFC going to suffer a massive drop in sales? Or will it be the debt that kills this chicken?
 
robz7777 said:
How much of the price movement is due to the "professionals" hoping to get this one off their books before they have to tell anyone?? Much prefer Allan Gray (formerly Orbis) buying this one as they are contrarian and have plenty of conviction on this one - having bought 18% of all stock in the past few months..

Even if things really go to the dogs is KFC going to suffer a massive drop in sales? Or will it be the debt that kills this chicken?
Click to expand...

I know this happened in Sydney (and so outside CKF ownership):

KFC Ordered to Pay Millions After Customer Gets Chicken-Related Brain Damage

http://www.topix.com/forum/health/food-poisoning/T4MQC23C9QN5VQ17H

But this could really affect sentiment, and there are an awful lot of teenagers behind the counter (the teenagers in my house can't boil water properly).
 
robz7777 said:
How much of the price movement is due to the "professionals" hoping to get this one off their books before they have to tell anyone?? Much prefer Allan Gray (formerly Orbis) buying this one as they are contrarian and have plenty of conviction on this one - having bought 18% of all stock in the past few months..
Click to expand...

Yeah i noticed that to, Orbis (now Allan Gray) i keep bumping into these guys :) with 50/50 results...i entered ILU a couple of months before Orbis and we both made a motza, and then Orbis entered APN a couple of months before me and we both got smashed. :dunno:

I suppose contrarian investing in Aust is alot like value investing in that there's only 5 or 10 stocks that stand out at any one time and like minds find them...like contrarian bees drawn to a contrarian honey pot.
 
FWIW I think CKF has some real cash issues. I know this sounds crazy for a fastfood business selling friend chicken... but looking at the financials.

H1 2011 operating cashflow was $11m after paying $11m interest. The HY result presentation earmarked ~$17.6m cap ex for new outlets and refurbishment. So they are pretty much $6-7m short on that.

They do have $40m in debt headroom, but the balance sheet also showed current payables of $46.3m (with only very little receivables ($2.7m) and inventories ($4m) against that).

So depending on what is in those payables, they potentially need to find extra $20-25m which means they need to draw down on their debt. This in turn adds another $1m to the interest bill. This may or may not be offset by the all out cost cutting initiatives as per the news article. They can also cut down on capex/refurbishment program - but that will have an impact on the top line sales.

The H1 proforma (i.e. stripped of IPO costs) NPAT was $8m, and the guidance is lower end of $18-20m for the year. So they need to achieve $10m in H2 alone... and given the recent trading update on H2 sales expectation being revised down again, the market has every reason to be sceptical about CKF hitting guidance.

Then again, at current price CKF only has a market cap of <$100m. They do have high debt so a PE ~6x is probably the ballpark multiple. On that note they only need ~$7-8m NPAT in H2 to justify the current valuation. So while fundamentally they may not be turning around yet, the share price can probably bounce a bit without too much problem.
 
Great post SKC, I believe waiting for the next report is probably a good idea for taking the plunge.
 
skc said:
FWIW I think CKF has some real cash issues. I know this sounds crazy for a fastfood business selling friend chicken... but looking at the financials.

H1 2011 operating cashflow was $11m after paying $11m interest. The HY result presentation earmarked ~$17.6m cap ex for new outlets and refurbishment. So they are pretty much $6-7m short on that.

They do have $40m in debt headroom, but the balance sheet also showed current payables of $46.3m (with only very little receivables ($2.7m) and inventories ($4m) against that).

So depending on what is in those payables, they potentially need to find extra $20-25m which means they need to draw down on their debt. This in turn adds another $1m to the interest bill. This may or may not be offset by the all out cost cutting initiatives as per the news article. They can also cut down on capex/refurbishment program - but that will have an impact on the top line sales.
Click to expand...

Just a couple of observations from my reading.

I can't imagine that $11m interest bill will be as high going forward, unless they are such a poor credit risk that they are paying $22m in interest on $105m debt. I believe the reason for the large interest bill was related to the pre-float debt level of $262m. The prospectus pro-forma interest is around the $8-$9m mark for the proceeding three years. That should free up a significant chunk of cash for CAPEX and leave some over for dividends.

On the payables, I assume this is just a normal retailer's balance sheet and the negative net working capital is a good thing.

That being said, you wouldn't buy it for it's tangible assets. What's the nature of the agreement with Yum?
 
McLovin said:
Just a couple of observations from my reading.

I can't imagine that $11m interest bill will be as high going forward, unless they are such a poor credit risk that they are paying $22m in interest on $105m debt. I believe the reason for the large interest bill was related to the pre-float debt level of $262m. The prospectus pro-forma interest is around the $8-$9m mark for the proceeding three years. That should free up a significant chunk of cash for CAPEX and leave some over for dividends.
Click to expand...

You are quite right. $8-9m for the full year going forward is probably much more sensible. So they probably not short of cash to pay for the capex fr op cashflow.


McLovin said:
On the payables, I assume this is just a normal retailer's balance sheet and the negative net working capital is a good thing.

That being said, you wouldn't buy it for it's tangible assets. What's the nature of the agreement with Yum?
Click to expand...

Just can't quite pin down the corresponding balance sheet item for the payables. Most retailer's balance sheet should show inventory against the payables... but CKF is not storing a lot of chicken. It is possible that KFC is asking the chicken farmers to fund their inventory via generous payment terms. But with CKF being a recent private equity sale - you just don't know if there are some temp arrangement that makes the balance sheet look different than how it would going forward.
 

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