Collins Foods (ASX:CKF): At less than 8x EV/EBITDA, this stock looks 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.

It is nonetheless as a pivotal point as it has fallen over 30% this year. After being resilient to high inflation, unlike Dominos (ASX:DMP), the company has begun to feel the pinch.

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.

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.

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.

Growth has slowed down

In FY24 the company delivered record revenue, $1,448.9m with growth across all divisions. Its EBITDA was up 12% to $229.9m, its underlying profit was up 15% to $60m with its statutory profit being $76.7m – a figure way higher than $12.7m in FY23, but FY23 was deflated by the $36.7m impairment of Taco Bell whilst FY24 was inflated by the sale of Sizzler Asia. The company managed to reduce its net debt from $212.2m to $165.5m.

But…the company revealed to investors that trading conditions were softer due to inflation. And adding insult to injury, O’Malley had announced his resignation just 2 weeks prior. Investors liked his leadership, but as with any popular CEO, whenever the boss departs can lead to a period of uncertainty.

The company released a trading update in late August reporting that although sales rose 1.1%, the profit was more than offset by the impact of ‘persistent’ inflation. And so it told investors that EBITDA margins for 1HY24 would reduce by 1.3-1.6% and EBIT margins 1.5-1.8%. Statutory results were released only last week. The revenue guidance ended up being right, although its EBITDA slid 6.6% and its underlying profit was down 23%. The company reducing its net debt further was not enough to offset the impact. Investors were further told it was more of the same in the first 7 weeks of trading. For the ful year it told investors to expect an EBITDA margin of 14.2-14.7% (compared to 15.4%) the year before and an EBIT margin of 6.8-7.3% (compared to 8.3%). Its interest expense would be $4m higher, at $42m, and its effective tax rate would rise from 30.3% to 33%.

New CEO Xavier Simonet told investors among his priorities would be reviewing the growth strategy and delivering profitable growth.

When will it return to growth?

The mean target price amongst analysts covering Collins Foods is $9.87, a 24% premium to the current share price. But they expect a retreat on the bottom line – EPS to decrease from 65c to 39c, which would translate to a $46m profit – either way (statutory or underlying) a decline from FY25.

The good news is revenue is expected to grow by 1% and FY26 will see a recovery, with a $63m profit followed by $80m in FY27. Revenue growth will accelerate in those years according to analysts, with >6% growth both years. The estimates derive an EV/EBITDA of 7.65x, a P/E of 20.8x and a PEG of 0.99x.

Does Collins Foods appear to be worthy of its slogan?

The KFC slogan is that its chicken is “finger lickin'” good. Does this same slogan rings true to the company as an investment right now? Probably not right now, but we may revisit when it releases its FY25 results in July next year, and we can see the bottom line improving. It may take another 12-18 months for this to happen, and there may be further downside if things get worse before they get better.

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