KFC's top-line & bottom-line still growing

The noticeable slowdown in restaurant business has not affected the performance of KFC, the biggest fast food chain in Malaysia. Its results for 3Q2008 ended 30/9/2008 shows that its net profit has increased by 3.4% q-o-q or 20.0% y-o-y to RM31.5 million. Its turnover has also increased by 4.3% q-o-q or 28.9% y-o-y to RM552 million.



KFC (closed at RM6.90 yesterday) is now trading at a trailing PE of 11 times (based on its last 4 quarters' EPS totaling 61 sen) or a Price to Book of 2.0 times (based on its NTA of RM3.40 per share as at 30/9/2008). At these multiples, KFC is still attractive.

From Chart 1, we can see that KFC's share price has been trading within a wide range between RM5.50 & RM7.50.


Chart 1: KFC's weekly chart as at Nov 20, 2008 (source: Quickcharts)

While KFC is clearly in a long-term uptrend line (with support at RM4.00), the immediate medium-trend line support is at RM5.50 (see Chart 2 below). The sharp spike-up in the share price could be due to window-dressing activities by some local funds. At the same time, there were some sharp spike-down. Could these be linked to price manipulation by parties who wished to gather control of this company?


Chart 2: KFC's monthly chart as at Nov 20, 2008 (source: Quickcharts)

The biggest negative for KFC is its related parties transactions. In the past 2 years, there were a few occasions where it had acquired assets from the related companies at prices that analysts found to be on the high side. Despite consternation among investors, these transactions still occurred. As a result, KFC may not be well-owned by institutional investors. This may serve the interest of KFC's major shareholder, QSR (& the ultimate shareholder, Johor Corp), since QSR is known to be quite intent on taking KFC private.

In conclusion, KFC is a good defensive stock for long-term investing. It is trading at an attractive price. However, it has a big drawback in term of related parties transactions.