CKF - Collins Foods

[Ves]

Interesting results.

Two main things I saw in my very brief look:

1. They are still "comfortably" within their debt convenants. Although this comes down to how much economic reality you give their depreciation claims. It's more than half of the EBIT.

2. This business clearly has no control of costs. In fact, their suppliers, competitors, lessor(s) etc are putting lots of pressure on their profitability margins. For instance, they believe the carbon tax will have a $2.5 million impact on their business according to the presentation, but they cannot pass any of this on. They make an excuse about the business environment and poor trading conditions that are around at present, but this looks like management speak for it's out of our control to me.

edit: On a more long-term note; if they ran this company efficiently and competently there is probably no reason why 5-7% avaerge EPS growth is not unachievable. I'm not convinced yet that the particular team at the moment is capable of this.

 

[McLovin]

Coupolos Group been doing a bit more buying.

 

[ROE]

I join the Coupolus family and double up
These guys know kfc better than any one in Australiaq

 

[Tannin]

Excellent thread, people, and a very interesting company.

On the negative working capital thing that SKC and McLovin were discussing a little while back, that's normal for this sort of business. They hold back on paying their suppliers for as long as possible (just because they can) but as a supplier you smile and come back for more because hardly anyone else buys chicken or oil or bread in the sort of quantity KFC does, and although you hate waiting for your money, you know that they are always going to be good for it eventually.

Most retailers do this. Suppliers hate it but they do it just the same. But most retailers have to carry a lot of stock.

In the fast food game, you don't keep the inventory on hand, so it doesn't show up as a current asset, while your raw material bills do show up as a current liability, so there is an apparent imbalance. In fact, your small amount of current inventory is worth a lot more than its book value (book value in this context = bare cost price plus delivery) because later this week you will spend a fairly small amount on electricity and labour and magic the $2000 worth of cheap chickens in the fridge into $20,000 worth of take-away meals.

In short, the negative working capital isn't a problem for this sort of company, it is actually a sign that they are screwing their suppliers over and making the poor bloody farmer finance the day-to-day running cost of the business - i.e., that they are hard-nosed managers getting a good deal for the organisation.

On the down side, I am concerned that they don't seem to be lifting sales and margins back to where we would want them to be yet. Management says that they are working on it and everything will turn out roses. Well, we will just have to wait and see. Sometimes I wonder if Australians are finally turning away from stuff like KFC in favour of tastier, more healthy meals - you know, ones with actual food in them. But then I decide that no-one ever went broke selling grease and too much sodium in a fancy bucket, and that there will always be a place for KFC.

Disclaimer: I bought a smal lparcel back in March at $1.17, and doubled down a few weeks later at $1.13, would have gone back for a third lot at around $1.05 when it hit that low but was away or distracted and missed the chance. I'm still open to the idea of getting a little more if the price is right - anything under $1.10 would be hard to say no to (but depending on what else I have going at the time). I'm happy to sit on my holding for now. The share price seems to have turned the corner and over time I remain confident of a modest but worthwhile profit. We will see.

 

[skc]

In short, the negative working capital isn't a problem for this sort of company, it is actually a sign that they are screwing their suppliers over and making the poor bloody farmer finance the day-to-day running cost of the business - i.e., that they are hard-nosed managers getting a good deal for the organisation.

I think that is a fair conclusion. What I came away from that though, is that the benefits of such supplier squeeze went to the private equity guys who sold out, and not to the buyers of public float (or current buyers/holders).

Their profit figures were in line with forecast and cashflow was much improved so the strain on the balance sheet is probably lower than what I evisaged. The FY13 figures are still not awesome from a growth point of view and they have to muddle the bottom line figure with qualifiers like "ignoring carbon tax effect".

It is still a cheap share and it is cheap for a reason. As you said, things may or may not work out but that's the same with lots of companies I guess.

 

[Tannin]

Cheers, Skc.

No doubt at all that the private equity guys made a killing, and no wonder that the instititionals who bought in at the top expecting much better value than they got are unhappy.

There are essentially two different sorts of debt we should be considering here. The long-term debt is what the PE guys saddled the company with and here I agree with you entirely. The negative working capital, however, is a much smaller amount (if I remember the numbers correctly) and there would be no intention of ever paying that off. Why should they? They get the money for nothing, so they'd be mad not to take advantage of it! I would expect that negative working capital ratio to exist pretty much forever, and I'd expect other firms in the same general line of business to operate in a similar way.

The overall carbon tax effect should be close to zero. On the downside, the cost of energy for lights and fryers and fridges increases by about 10%, and most other fixed inputs rise by a bit less than 1% (raw materials, building costs, and so on). Wages - a very large expense - do not change. On the upside, low to middle income Australians now have more money to spend (because of the income tax cuts that came in on July 1) and fast food operations depend overwhelmingly on low and middle income bracket customers. Wealthy people now have have a small amount less to spend, but it's hard to see these quite small changes having any impart of fast food sales, and in any case, higher income people tend to go a bit further upmarket whern they eat out. So all in all, it looks like being a non-event for CKF.

We will watch with interest.

 

[skc]

There are essentially two different sorts of debt we should be considering here. The long-term debt is what the PE guys saddled the company with and here I agree with you entirely. The negative working capital, however, is a much smaller amount (if I remember the numbers correctly) and there would be no intention of ever paying that off. Why should they? They get the money for nothing, so they'd be mad not to take advantage of it! I would expect that negative working capital ratio to exist pretty much forever, and I'd expect other firms in the same general line of business to operate in a similar way.

Yes I agree the negative working capital will be ongoing. What I meant to say was that the one-time benefit of reducing working capital was most likely gained by the PE guys (although I can't be sure if that is the case - the negative working capital may have been around for some time) rather than current holders. The current holders should benefit from a higher ROE than otherwise in future new investments.

The overall carbon tax effect should be close to zero.

Management is quoting $2.5m pre-tax impact of carbon tax so I am just saying what they said. Now if the real impact of the carbon tax is $0 then they've got themselves some buffer in their profit numbers.

 

[Tannin]

I agree on both counts.

 

[So_Cynical]

(22nd-May-2012 11:43 PM)

I think the bottoms in... at least until we get another negative announcement.
~

Turns out i was 100% correct, the bottom was in, also with hindsight it turns out my falling volume/seller exhaustion thinking was also 100% correct..to bad i only made a couple of hundred outa this. :cussing: i will continue to hold for the dividends and look for a re-entry opportunity.

This thread got really busy when the SP was falling and myself and a few other contrarians took positions...now the turn around is established no ones interested.
~

 

[ROE]

Most people under-estimate the reliability earning of fast food even with high debt ...
watch and see as they clean up debt and start kick ass dividend.

 

[Huskar]

Most recent quarter-on-quarter uptick in food and takeaway retailing gives some positive insight:

http://www.abs.gov.au/ausstats/abs@.nsf/mf/8501.0.

 

[McLovin]

Some interesting commentary in the HY results. The collapsing revenues seem to have been halted, albeit at the expense of lower margins. They've cut pretty deep into some of their operating costs but still have seen EBIT margins fall.

It appears that the standalone KFC stores are doing OK, it's the food court ones that are suffering. This would make sense given the current retail environment. They're not looking as bad as they were 6 months ago, although they still have all that debt and are going pretty CAPEX hard at the moment. Maybe not the best time to declare your maiden dividend when it can't be supported by FCF.

 

[So_Cynical]

New 10 month high of $1.40 and goes ex dividend tomorrow...just to easy.

Why cant they all be this easy. :dunno: people were falling over themselves to bag this stock 6 and 8 months ago.

 

[skc]

New 10 month high of $1.40 and goes ex dividend tomorrow...just to easy.

Why cant they all be this easy. :dunno: people were falling over themselves to bag this stock 6 and 8 months ago.

I still want to bag this stock!

I bought some KFC yesterday and they were terrible. The chicken was dry and luke warm, the chips lacked salt and were luke warm.

I asked my wife to punch me in the face, everytime I said I feel like some KFC in the future.

Oh... good trade btw.

 

[Huskar]

Copulos family is still buying. Up to 7% of the company now...

Interesting to compare KFC with Maccas - why is it that McDonalds is seeing growth downturn for the first time in 10 years while KFC is not?

 

[Cyph]

How can you touch this one when the ROE is under 7%?

 

[ROE]

How can you touch this one when the ROE is under 7%?

It's not always about current Return on Equity...you can buy stock in anticipation for higher return on equity and
that where you can make serious return...

Sometimes the stock is so cheap you can make plenty of money by it improve its operation
a little and improve margin little and everything else will fall in place...

This stock is badly manage and laden with debt, I think as a listed company and the Copulus
family involvement, this stock will improve over time I'm not losing money on this one my average price is 1.10 and it already paid dividend doesn't take make much more for it to go higher...

at $1.10 and say dividend maintain 7-8c a share you get around 6.5-7.5% fully frank dividend and I'm fairly close
to certain that can be maintained if not increase in coming years...beat money in the bank any day.

I know fast food business, very very reliable cash flow....

 

[davdaw]

Wonder how the guys at WBC/BT Investment Management feel seeing the share price at $1.43 today, after dumping just under 4m shares at $1.29 on Friday (4/1/13)? Or is something corporate and clever going on that small retail investors can't understand? I have 38,000 CKF shares.

 

[ROE]

Wonder how the guys at WBC/BT Investment Management feel seeing the share price at $1.43 today, after dumping just under 4m shares at $1.29 on Friday (4/1/13)? Or is something corporate and clever going on that small retail investors can't understand? I have 38,000 CKF shares.

Dont worry about large fund managers, they played by different rules...at least they dont cause much a concern for me entering or exiting....they have to buy and sell according to a set of rules set out for their fund which is nothing like my set of rules for buying and selling...

it's a positive thing that the Copolus family keep increasing their stake...CKF will turn with this family involvement decent money already been made buying at $1.10 ..more to come...

I always place my money with family business wealth and not the fund manger money...
you rarely lose sticky to decent business that has large family fortune ties to the business.

 

[Huskar]

Interesting to note that KFC visits have fallen from 24% of Aussies to 20% over the last year as people visit less quick food joints:

http://www.ausfoodnews.com.au/2013/03/13/mcdonald’s-defies-qsr-downward-trend.html.

McDonalds still the clear leader and holding its market share at 31% of all Australians visiting it in 2012!