Broker Rec

Fat Prophets June 11 Rec

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0	CKF - 11 June 2014

Collins Foods - CKF - BUY
Getting a taste for it
Investor sentiment towards Collins Foods (ASX: CKF) has remained solid since our last update, despite an absence of any significant announcements. We believe this says much about how the market is viewing "Collins" ability to perform well, despite the headwinds still facing the highly competitive quick service restaurant sector.
The fact remains that "Collins" core KFC franchise is growing resiliently from an organic perspective, with same store sales on the up. Such an effort is boosting the "company" financials, and facilitating the ability to make meaningful internal investment and acquisitions, including the recent purchase of Competitive Foods.
While the shares have now reclaimed the $2 mark, we continue to see good value and much quality in the turnaround play that Collins represents. The shares remain attractively priced in our view, trading at 10.6 times consensus fiscal 2014 EPS estimates (8.8 times for 2015), 0.96 times book value and yielding 5.1 percent, fully franked. The "stock" valuation also compares favourably against its peer group which trades on a forward earnings multiple of 13.9 times.
Accordingly Collins will remain firmly held in the Fat Prophets Portfolio, and we recommend the stock as a medium term buy to Members without exposure.
Trading Recap
Recent trading updates have illustrated that Collins is performing stoically despite a still tough trading environment, and general fragility of the Aussie consumer. Same store sales growth for the third quarter came in at 1.7%, which was above the 1.3% in the first half of the financial year. It is also reassuring that management are confident of hitting overall earnings targets for the full year.
Whilst the chickens are certainly in the pot at the KFC business, the Sizzler operations are still in need of reparative care. The chain saw same store sales decline 9.6% last summer, with trading improving at a modest rate since.
As we have said before, Sizzler accounts for around a fifth of group sales and earnings, and therefore is not a business management can ignore. In turning around the KFC operations management have something of a blueprint (through organic investment and promotions) although Sizzler is clearly a different beast. We remain of the view that management will put Sizzler store expansion in a holding pattern until operations here begin to show more material improvement.
The KFC business meanwhile is performing solidly, due to an increase in patronage and spend, thanks in part to a new store-opening and refurbishment program. A productivity and operational efficiency initiative has meanwhile bolstered underlying margins.
The KFC business has been given a further shot of adrenalin following the acquisition of Competitive Foods. The deal gives Collins 40 KFC stores in Western Australia and 4 in Northern Territory, which will allow management to roll out its expansion and efficiency initiatives to new territories with additional opportunities to extract top line growth.
The Competitive Foods deal is set to be accretive to earnings per share to the tune of 15% in fiscal 2015. Meanwhile for 2014 management are sticking to a full year profit forecast of $17.3 million. Give downgrade missteps of recent years we would be surprised if there is not some "slack" in this number.