PP 7767/09/2010(025354)

25 June 2010

Malaysia Corporate Highlights RHB Research

Institute Sdn Bhd
A member of the
RHB Banking Group
V is it Note Company No: 233327 -M

25 June 2010
MARKET DATELINE

QSR Brands Share Price

Recom
:
:
RM3.63
Not Rated
Value In Quick Service Restaurant Business

Table 1 : Investment Statistics (QSR; Code: 9415) Bloomberg: QSR MK

FYE Dec Turnover Net Profit EPS Chg PER P/NTA Net gearing ROE Net Div.
(RMm) (RMm) (sen) (%) (x) (x) (x) (%) Yld. (%)
2008a 532.8 85.3 29.8 27.3 12.2 1.6 0.4 13.4 3.0
2009a 2,760.3 90.8 31.7 6.5 11.4 1.5 0.4 12.8 3.6
2010f^ 2,866.1 106.2 37.1 16.9 9.8 1.4 0.4 14.3 3.5
2011f^ 3,032.5 120.6 42.1 13.6 8.6 1.2 0.4 13.9 3.5
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC ^ Based On Consensus Estimates

♦ Strong trend in demand likely to continue in 2010. In 1QFY12/10, QSR Issued Capital (m shares) 286.4
Market Cap (RMm) 1039.6
recorded SSS growth of 7% for its Pizza Hut business (PH) and 8% for its
Daily Trading Vol (m shs) 0.2
KFC business in Malaysia. We anticipate strong SSS growth trend to continue
52wk Price Range (RM) 3.63-3.80
for the rest of 2010 following: 1) FY09’s low base factor; 2) continuous effort
Major Shareholders: (%)
by PH and KFC in initiating new product innovations to cater for local Kulim 59.6
consumer preference; 3) aggressive advertising campaigns; and 4) Lembaga Tabung Haji 9.8
improving consumer sentiment.

♦ Continue growing its number of outlets and introducing “Pizza Hut FYE Dec FY10 FY11 FY12
Delivery”. QSR targets to open 20-25 new Pizza Hut outlets p.a. and 40 EPS chg (%) n.m. n.m. n.m.
Var to Cons (%) n.m. n.m. n.m.
new KFC outlets p.a. for FY10-12. QSR will also be introducing 3-5 new
“Pizza Hut Delivery” (PHD) outlets by end-10 / early-11, to compete with PE Band Chart
Dominos, which is currently dominating the pizza delivery business in
Malaysia. PHD’s business model is to provide more affordable and quicker
delivery service pizzas. We believe that PHD could gain favour in the pizza PER = 14x
PER = 12x
delivery market to compete with Dominos given its improved affordability PER = 10x

and speed. Furthermore, as PH Malaysia’s delivery vs. dine-in composition is

currently at 18:72, much lower than Singapore’s 50:50, we believe there is
much room for improvement in this segment.

♦ Development in India showing positive signs. Management highlighted

Relative Performance To FBM KLCI
that is first KFC outlet in Pune, India, is currently generating about RM18-
19k/day, which is about 2x the revenue/day generated in Malaysia. KFC will
QSR Brand
also be opening its outlet in Mumbai by month-end, which will be located in a
food court.

♦ Risks. Main risks for KFCH include: (1) bird flu outbreak; (2) escalation of FBM KLCI

corn and soybean prices, which would eat into margins; (3) deteriorating
consumer spending power, resulting in lower same-store sales growth; and
and (4) cannibalisation of PH’s dine-in business market share after the
introduction of PHD.

♦ Investment case. Based on consensus estimates, we highlight that QSR’s

estimated FY10-11 PERs of 9.8x and 8.6x respectively are significantly lower
than for KFC. Our estimates suggest that KFC is trading at an average FY10-
11 PERs of 13.1x and 11.2x respectively, or 34% and 30% above that of
QSR. Based on 12.5x target PER on QSR’s FY11 consensus earnings (our
target PER for KFCH), the fair value for QSR would be at RM5.25, which Hoe Lee Leng
represents a 44.6% upside from the current share price. Coupled with (603) 92802239
commendable yield of 3.5% (based on 25% minimum dividend payout hoe.lee.leng@rhb.com.my
policy) and potential share price catalysts from: 1) earnings upside; and 2)
M&A activities, we believe that QSR is an attractive buy.

Please read important disclosures at the end of this report.

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Visit Update

♦ Strong trend in demand likely to continue in 2010. In 1QFY12/10, QSR recorded SSS growth of 7% for its
Pizza Hut business (PH) and 8% for its KFC business in Malaysia. We anticipate strong SSS growth trend to
continue for the rest of 2010 following: 1) FY09’s low base factor; 2) continuous effort by PH and KFC in initiating
new product innovations to cater for local consumer preference; 3) aggressive advertising campaigns; and 4)
improving consumer sentiment. Despite there being a risk on the removal of consumer subsidies, we believe that
it would only temporarily affect consumption habits for the group as: 1) there is a higher likelihood of
government servant bonus being awarded in 2010 (none given in 2009 due to the economic downturn); and 2)
the absence of any significant signs of slowdown in consumption in mid-2008 despite the electricity and petrol
price hike.

♦ Continue growing its number of outlets and introducing “Pizza Hut Delivery”. QSR targets to open 20-25
new Pizza Hut outlets p.a. and 40 new KFC outlets p.a. for FY10-12. QSR will also be introducing 3-5 new “Pizza
Hut Delivery” (PHD) outlets by end-10 / early-11, to compete with Dominos, which is currently dominating the
pizza delivery business in Malaysia. PHD’s business model is to provide more affordable and quicker delivery
service pizzas, vs. their DELCO (delivery and carryout) concept (currently has 17-18 outlets, which would be
converted to PHD gradually). We understand that PHD’s pizzas use a different dough vs. PH’s pizzas, which cost
less in comparison and would also reduce the baking time by approximately 40%. PHD’s pizzas would also be
more affordable given the absence of 5% sales tax and the lower start-up cost (about 40-50% lower than PH).
We believe that PHD could gain favour in the pizza delivery market to compete with Dominos given its improved
affordability and speed. Furthermore, as PH Malaysia’s delivery vs. dine-in composition is currently at 18:72,
much lower than Singapore’s 50:50, we believe there is much room for improvement in this segment.

♦ Development in India showing positive signs. Management highlighted that is first KFC outlet in Pune, India,
is currently generating revenue of about RM18-19k/day, which is about 2x the revenue/day generated in
Malaysia. KFC will also be opening its first outlet in Mumbai by month-end, which will be located in a food court.
We believe that the Indian market continues to be exciting, as we expect growth to be strongly backed by the
approximately 19.1m combined population in both cities, coupled with potential SSS growth of more than 20%
p.a. based on the SSS growth achieved by the existing KFC restaurants operated by other franchisees in India.
Furthermore, Maharashtra, the state where both cities are located at, has the second largest population in India
with 42% of the population living in urban areas. Moreover, India being the home of the second largest Muslim
population in the world (with about 10% of population in Maharashtra and 13% of Indian population being
Muslims), we believe its growth will be further accelerated by the “halal” status obtained by its outlets in the
country. We note that KFCH has made it a point to ensure that all its raw material suppliers in India are certified
halal.

Risks

♦ Risks to our view. The risks include: (1) bird flu outbreak; (2) escalation of corn and soybean prices, which
would eat into margins; (3) deteriorating consumer spending power, resulting in lower same-store sales growth;
and (4) cannibalisation of PH’s dine-in business market share after the introduction of PHD.

♦ Mitigating factors. We believe a bird flu outbreak may not have a drastic impact on sales as long as there are
no reported human cases of the infection. This can be evidenced by KFCH’s relatively unaffected 3QFY07 results,
when bird flu cases were discovered in Selangor in June 2007. To mitigate the rising raw material cost pressure,
QSR aims to continue to strive to improve operating efficiency such as to open selected high traffic outlets 24
hours to leverage on its relatively high fixed cost structure. With regards to the deterioration in consumer
spending power, we think QSR’s sales may not be as badly affected, given the relatively low ticket-item pricing
and the stable demand for non-luxury food products. While we believe there could be some cannibilisation of PH’s
dine-in business market share, we believe that the pros outweigh the cons, as the PHD business helps to tap into
a different market segment i.e. more price sensitive and convenience-seeking consumers.

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Valuations And Recommendation

♦ QSR trades at a discount to KFC. Based on consensus estimates, we highlight that QSR’s estimated FY10-11
PERs of 9.8x and 8.6x respectively are significantly lower than for KFC. Our estimates suggest that KFC is trading
at an average FY10-11 PERs of 13.1x and 11.2x respectively, or 34% and 30% above that of QSR.

♦ >44% upside. Based on 12.5x target PER on QSR’s FY11 consensus earnings (our target PER for KFCH), the fair
value for QSR would be at RM5.25, which represents a 44.6% upside from the current share price. Coupled with
commendable yield of 3.5% (based on 25% minimum dividend payout policy) and potential share price catalysts
from: 1) earnings upside; and 2) M&A activities; we believe that QSR is an attractive buy.

o Earnings upside. We believe consensus net profit of RM106.2m in FY10 underestimates the earnings growth for
KFCH, QSR or both in FY10. Based on our estimated net profit for KFCH for FY10 of RM152.8m, consensus
numbers are only looking at a flat yoy growth for its PH business. Assuming a 7% SSS growth for PH, we believe
that QSR could potentially record more than RM110m NP in FY10, which could potentially bring QSR’s trading PER
to less than 9.5x FY10.

o M&A (refer to our KFCH report on 8 Oct 09). We believe that Kulim could potentially be interested in undertaking
a GO for the remaining 40% of QSR stake it does not own, given Kulim’s balance sheet capacity and the fact that
this would not dilute its stake in QSR and KFCH. Furthermore, the acquisition through QSR would be relatively
cheaper.

Table 2. Earnings History

FYE Dec (RMm) FY08a FY09a FY10F* FY11F*

Turnover 532.8 2,760.29 2,866.07 3,032.47

Turnover growth (%) 14.2 418.1 3.8 5.8

Cost of Sales -162.9 -1,166.3 -1,687.2 -1,743.9

Gross Profit 369.9 1,594.0 1,178.90 1,288.60

EBITDA 90.0 354.0 378.3 373.0

EBITDA margin (%) 16.9 12.8 13.2 12.3

Pretax Profit 97.7 230.3 188 207.4

Tax -14.0 -71.9 -50.8 -56
Minorities 0.2 -67.5 -1.5 -1.8
Net Profit 85.3 90.8 106.2 120.6
Source: Company data, Consensus estimates*

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
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contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
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from time to time have an interest in the securities mentioned by this report.

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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon
various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher
risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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subject to the duties of confidentiality, will be made available upon request.

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actions of third parties in this respect.

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