KEY POINTS
- Collins Foods, the company behind KFC in Australia, just had its best year on record, with higher sales and a profit nearly four times bigger than last year.
- Even so, the shares fell about 2.5% to A$8.15, close to their lowest point in a year.
- The reason: business in Europe has slowed, and the company gave no profit forecast for the year ahead.
- Australia is still strong; Europe is the worry. It looks like a quality business trading cheaply, but the unclear outlook is a reason to be patient.
Collins Foods (ASX:CKF), the company behind KFC in Australia and parts of Europe, slipped about 2.5% to A$8.15 on Tuesday, even though it just reported a record full year. Sales from its core KFC operations rose to about A$1.59 billion, statutory profit nearly quadrupled to A$47.1 million (up from A$12.4 million the year before), and the company lifted its full-year dividend 7.7% to 28 cents per share.
The shares rallied as much as 7.7% early in the morning before completely reversing and sliding to close near their 52-week low. So why did a record year end in a sell-off? The answer is more about the future than the past.
Why did Collins Foods shares fall after a record result?
Two things weighed on the stock. First, the company did not give a profit forecast for the year ahead, and it warned that sales have started slowly for the new financial year in Europe, especially Germany and the Netherlands, hit by elevated fuel prices, a prolonged regional heatwave that kept customers away, and weaker consumer confidence amid Middle East tensions. That uncertainty made investors cautious.
Second, the big jump in profit was flattered by a weak prior year and the exit from its loss-making Taco Bell business. The underlying profit (the cleaner number the market tends to watch) rose a steadier 13%. Still a good result, just not the blowout the headline number suggests. In our view, the sell-off is about worries over the months ahead, not a business in trouble.
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How is the Australian business doing?
Australia is the engine, and it is running well. Sales at stores open more than a year grew 2.7%, which points to real demand rather than just new shops opening. The one weak spot was profit margins, squeezed after Collins cut its delivery fee from A$8.95 to A$3.95. That sounds bad, but it is a smart trade: a lower fee brings in more orders and keeps customers from drifting to rivals. Management says delivery still makes money, just a little less per order.
What does dropping Taco Bell mean?
Collins is closing its loss-making Taco Bell business to focus only on KFC. This is quietly good news. Cutting a money-losing brand makes the company simpler and frees up cash to grow KFC, including in Germany, where it recently bought eight more restaurants. A cleaner business is usually an easier one to value and to own.
Is Collins Foods a buy after the dip?
It comes down to patience. The good side: a record year, less debt, a rising dividend (now yielding about 3.4%), no more Taco Bell losses, and a share price now near its lowest in a year. Before today’s result, analysts on average valued the shares well above this level, near A$11.79. The cautious side: no outlook for the year ahead and a slow start in Europe. For long-term investors, this looks like a quality business trading cheaply. More careful investors may want to wait for the next update from Europe, because that is where the risk now sits.
In short, Collins Foods had a record year, but the market sold the cloudy outlook, not the result, leaving a strong KFC business trading near its lows.
