My local fish-and-chip shop has boomed overnight. Like many takeaway joints, it has joined online food platforms that arrange home delivery. A procession of Uber Eats drivers picked up one order after another when I last visited, frustrating locals who ordered at the counter.
The Uber ticketing device ran hot, spitting out an order every few minutes. Extra staff was crammed behind the counter and cooked 20 burgers at once, such was the demand. The tiny fish-and-chip shop now served a market many times larger than before.
The fish-and-chip shop example provided several insights. It showed, yet again, how Uber, Menulog and Deliveroo are reinventing food delivery and changing how Australians eat. A food-delivery industry that was worth $600 million in 2006 will grow to $2.4 billion by 2025, predicts investment bank Morgan Stanley.
Also telling was the demand for home-delivered fried food. Cheap fish and chips seems an unlikely candidate for home delivery (it must be soggy upon arrival) but there is a large and growing market of customers that wants low-cost, unhealthy home-delivered food.
Which brings me to Collins Food, owner of 229 KFC outlets in Australia and 35 in Germany and The Netherlands. The company plans to build 50 Taco Bell restaurants over the next three years; it currently owns a handful of the Mexican restaurants.
I first identified Collins Food for The Bull in 2013. Collins Food has rallied from about $1.83 at the time of that article to $7.22. Restaurant Brands NZ, another of my favoured fast-food stocks, has also performed strongly over that period.
Chart 1: Collins FoodSource: The Bull
Macro trends favour both stocks. Strong population growth is a tailwind for prominent fast-food operators that benefit from a larger customer base. Also, Australians are snacking more each day and favouring cheaper, convenient fast food over healthy, costlier substitutes.
Moreover, chicken consumption keeps rising as Australians substitute red meat with white meat that is perceived to be healthier. Nobody would mistake KFC for being healthy, but I’d rather sell chicken products than high-fat beef burgers given consumer tastes and rising social concerns about the beef industry’s impact on carbon emissions and sustainability.
At a micro level, two drivers for Collins Food stand out. The first is the company’s potential to boost revenue through online sales channels. Delivery services currently operate from 44 of its KFC stores and Collins wants to double the size of its delivery footprint within six months. KFC, starting on some key food-delivery platforms, has terrific potential to build a much larger digital presence through food platforms and its own smartphone apps.
The market is underestimating the potential of KFC and Domino’s Pizza Enterprises to take their products to a larger market through outsourced home deliveries.
The food platforms, of course, create more competition (my local fish-and-chip shop, for example), but the big fast-food brands still do most of their business via instore food-pickups. They have a lot of potential growth in the home-delivery segment.
Online food ordering and home delivery is all about scale. Don’t be surprised if Australia eventually has one or two large food-delivery providers that dominate this market in an almost utility-like fashion. As an aside, takeaway stores that love Uber and Menulog today might love them less in coming years if they use their market power to lift their fees.
I suspect there is a segment of consumers (younger males) who find food on Uber and Menulog too costly to eat regularly (after delivery fees and minimum order requirement, on some platforms). The big fast-food operators have a scale and pricing advantage to attract this market.
The second driver for Collins Food is store growth. It expects to build, own and operate another 40-45 KFC stores in Australia over the next five years and acquire others. In Europe, Collins expects to roll out 8-10 stores annually in what is an undersaturated market for KFC.
I am less convinced about the company’s Taco Bell strategy. Others have tried to develop that brand in Australia and failed. Interest in Tex-Mex food is rising and perhaps the time is right to build a big chain of Taco Bell stores here and diversify Collins’ product offering.
The key issue with Collins is valuation. The stock rallied from $5.20 in August to $7.20 after better-than-expected earnings, before easing to $6.60 amid the sharemarket sell-off. It shares rose above $7 this week after a strong half-year result.
At the current price, Collins is on a trailing Price Earnings (PE) multiple of 17 times and yielding 3.1 per cent, fully franked. An average share-price target of $6.76, based on the consensus of four broking firms (a small sample) suggests the stock is fully valued.
That looks about right, although I suspect analysts will be upgrading earnings forecasts for Collins. The market is pricing a lot of growth into the well-run company, which deserves to trade at a premium given its performance and prospects. Collins has a powerhouse brand in KFC and plenty of growth potential from home deliveries, store rollouts and European expansion.
Collins would look more interesting closer to $6.50 and deserves a spot on the portfolio watchlists of experienced investors who understand the risks of investing in small-cap companies.
Patient investors should watch and wait for better value in Collins, one of the market’s higher-quality small-cap companies with genuine global growth potential.
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at November 27, 2018.