CKF has endured a tough 18 months basically halving in price as the operator of KFC and Taco Bell in Australia, Germany, and the Netherlands failed to meet earnings expectations, especially in late 2022 following the company’s half-year result – the largest issue was management flagging that rising inflation was likely to pressure margins through 2023. However, it was encouraging to see insiders buying, 4 directors bought parcels in the $40k-$80 region, better than the other side of the ledger – insiders now own over 8% of CKF.
Whilst uncertainty around important variables such as pricing, consumer strength & inflation persist for the overall business, we still like the longer-term story and see scope for an improved cost environment over FY24. We like the company’s 8 KFC acquisitions in the Netherlands which we believe represents a good opportunity to add some scale to their operations and take them closer to achieving their target of 130 new KFC stores by the end of 2031. However when we consider CKF what matters is the comparative valuation today, not the dizzy heights the stock scaled back in 2021. The stocks trading on an ok valuation of 19.5x while its projected 3.25% fully franked yield is unlikely to attract yield-hungry investors who can now get well over 4% on term deposit with CBA.
In a recession, restaurants feel the pain first as consumers tighten their belts and eat out less however some people trade down from casual dining to cheaper fast food chains i.e. KFC will often be closer, cheaper, and faster. During the GFC’s painful recession, McDonald’s performed well making it and similar plays like Collins Foods (CKF) solid defensive plays, especially for investors wanting at least some portfolio exposure to the Australian consumer.
- We like CKF as a defensive stock with a bounce towards $10 looking likely.
MM is bullish on CKF around $8.30.
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