Collins Foods (ASX:CKF): At less than 15x P/E, this stock is finger lickin’ cheap

Collins Foods (ASX:CKF) is one of the few opportunities for ASX investors in the fast food industry. It has a reputation for being resilient to economic downturns, because cash-strapped consumers will theoretically turn to these outlets. Many fast food stocks such as McDonalds were amongst the few stocks to see sales growth during the GFC.

Collins Foods (ASX:CKF) has been listed on ASX since 2011

Collins Foods operates KFC and Taco Bell Restaurants in Australia, Germany and the Netherlands as well as the Sizzlers restaurant in Thailand and Japan. It began in 1968 in the USA, owning stores in America and Australia, relocating Down Under in 2005 after it was acquired by Pacific Equity Partners (PEP). It listed on the ASX in 2011 at $2.50 when Pacific Equity Partners (PEP) wanted to exit and similar to other IPOs where bigwigs are selling – it did not start well.

A poor start, but a good recovery

Collins Foods downgraded its profit forecasts only weeks after listing, by over 25%. It took until early 2015 for the company to surpass its IPO price, but has traded above it ever since. The catalyst was acquisitions that generated revenues and that scaled up in their own right, but also provided platforms for store expansions in new regions. It also divested many (but not all) of its Sizzlers stores, which had gone bankrupt in the US in the 1990s and were left behind in Australia by new competitors, such as Grill’d and Guzman & Gomez.

After a few years of growth, the COVID pandemic presented several challenges for Collins Foods. The most prominant of these were lockdowns that closed food courts where its KFC and Taco Bell outlets were. The company had to make do with offering take-away service either from its stores or through delivery services. Compounding to investors’ raised eyebrows, just 3 months into the pandemic, was the retirement of long-term Graham Maxwell and his replacement with then COO Drew O’Malley.

Collins Foods (ASX:CKF) share price chart, log scale (Source: TradingView)

Managing the post-pandemic period well

In FY22 (the 12 months to June 30 2022), Collins Foods delivered $1.2bn in revenue (up 11% from FY21), $207.2m in EBITDA (up 13%) and a statutory NPAT from continuing operations of $54.8m (up 47%). Obviously the vaccine rollout and removal of restrictions helped. But so did the consolidation of its market position in the Netherlands – the company bought out the second largest franchisee in the market that expanded its footprint by 25% to 44 KFC restaurants and to more than half the market.

Collins Food is expanding more cautiously than Dominos

Topline growth continued into FY23, with revenue increasing 14% to $1.35bn, although its profit came in at just $11.3m given a $36.7m impairment to Taco Bell. EBITDA was flat at $205.1m. Revenue increased another 14% in 1HY24 and its profit came in at $50.5m (well ahead of the $11m in 1HY23 but inclusive of a $20m sale of Sizzler). It has not issued guidance for the full year, but did note that sales for Taco Bell and KFC in Europe grew over 8% in the first six weeks of the second half, while there was 2.9% sales growth in KFC Australia.

The bottom line from all these figures is that Collins Foods is expanding its footprint, but more cautiously than peer Dominos (ASX:DMP). It has managed short-term inflation better than many of its peers and clearly been able to maintain its value proposition to consumers.

Is there any growth left?

The mean target price amongst analysts covering Collins Foods is $12.02, a 26% premium to the current share price. Granted, there are varying opinions amongst these analysts, although the ‘lowest’ is still a slight premium to the current share price, at $10.25. Analysts expect $1.5bn in revenue (up 11%), $230.1m in EBITDA (up 12%) and $0.56 EPS, which would imply a $65.8m profit (nearly 30% higher).

In FY25, analysts expect $1.61bn in revenue (up 7%), $260m EBITDA (up 13%) and a $75.3m profit (up 14%). For FY26, $1.73bn in revenue (up 7%), $285.5m in EBITDA (up 10%) and an $88.2m profit (up 17%). Collins Foods is trading at a P/E of 14.9x and a PEG of just 0.55x for FY25, in our view very reasonable multiples to pay for the company considering Dominos is at 22x and it has been stagnant for the past 18 months.

Collins Foods appears to be worthy of its slogan

The KFC slogan is that its chicken is “finger lickin'” good. We think this same slogan rings true to the company as an investment right now considering its continued growth over the last 5 years and its cheap multiples.

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