The daily news flow of the Israel-Hamas was could result in a more prolonged consumer boycott on Berjaya Food Bhd’s (BFD) Starbucks outlets than anticipated, despite on-the-ground sentiment that suggests a degree of loyalty to the brand.
This is one of key observations by CGS-CIMB from three-month long ground checks at selected Starbucks outlet operations following a local consumer boycott since early November 2023 to protest the ongoing Israel-Hamas conflict.
On its other observations, the research house said: “We saw a varying footfall at Starbucks outlets, with healthy traffic observed at stores in tourism spots, airports, top-performing malls and urban centres.
“(We saw) poorer footfall at stores in sub-urban and semi-rural areas. We observed heavy traffic at certain popular locations during peak hours, especially at weekends, boosted by seasonal promotions since December 2023.”
Consequently, CGS-CIMB expected FY24F to be a washout year for BFD as a prolonged Israel-Hamas conflict will likely extend the boycott period.
“Hence, we cut our FY24F revenue and earning per share (EPS) estimates by 28.7% and 62.5% respectively to factor in lower sales and higher discounting due to heightened promotional activities.
“We also factor in lower Starbucks store openings to 30 from 40 new stores previously in FY24F amid the currently unfavourable operating environment,” it said.
However, it kept its forecasts of 40 to 45 new stores additions per annum for FY25F and FY26F.
The research house advocated that investors focus on the potentially strong EPS recovery as it projected FY25F and FY26F EPS of 110% and 59%, driven by a reacceleration in sales on the assumption that the boycott effects will ease by end-FY24F, and a more favourable input cost environment.
CGS-CIMB reiterated its ADD call on BFD with an unchanged target price (TP) of RM1, based on 18x CY25F P/E as it believed the negative impacts of the consumer boycott have been priced in.
“This is given its share price decline of 22% from its 6-month peak since the onset of the Starbucks boycott in Malaysia.
“We are also of the view that BFD’s store footfall and sales could rebound strongly when the Israel-Hamas conflict comes to an end, acting as a key rerating catalyst given the strong brand equity of Starbucks and management’s long-term operational track record.
“We also like BFD’s current undemanding valuation of 10.2x CY25F P/E, a 53% discount to its 10-year mean P/E of 21.9x.
“On the other hand, lower-than-expected sales and margins, as well as muted sales from a protracted boycott period beyond 2024F, are key downside risks,” it said.
