CKF’s core business relates to the operation, management and administration of KFC restaurants across Australia, Germany and the Netherlands.
With CKF having just reached the end of its financial year on 29 April, it’s perhaps a good time to revisit the investment case for the business. Though only listed on the ASX since 2011, Collins has been around since the 1960s, having obtained its first KFC franchise in 1968. In the decades since, CKF has steadily grown its footprint and is now one of the more prominent KFC focused franchise operators in the Australian market (at around 30% KFC network share).
In recent years, CKF has continued to build out its domestic presence via a greenfield store roll-out program and selective acquisitions. Inclusive of recent acquisitions, CKF’s KFC Australian store network has grown substantially to 225. Over the next three to five years, we expect this network to grow organically by about eight stores per annum.

Figure 1. CKF’s KFC Australia store network.
Source: CKF 1H2018 Presentation
Management has also taken decisive action in recent years to invest in what will likely become the next key driver of growth for the company: Western Europe. As at the half year, CKF had a total of 31 KFC restaurants, split between 15 in Germany and 16 in the Netherlands.
CKF are also guiding to a considerable greenfield store roll-out in each country, having suggested the business is ‘on target to open 3 to 4 in Germany and 3 to 4 in Netherlands during 2018 calendar year.’ While coming off a smaller base, this implies a substantial long-term growth opportunity in markets deemed underpenetrated by both YUM! Brands and CKF management.
Beyond KFC Australia and Europe, a new opportunity on the horizon is that of Taco Bell, another leading QSR brand from the stable of YUM. Though management are doing their best to manage expectations, we understand CKF’s first Taco Bell store continues to trade well above expectations. CKF has two further stores scheduled to open this calendar year. While at an early stage, if subsequent stores prove to be as successful as CKF’s initial Annerley restaurant, we see significant scope for a further meaningful store roll-out over the next five to seven years.

Figure 2. The Taco Bell Opportunity
Source: CKF 1H Presentation
We have long been attracted to the consistent cash flow profile of the CKF business, which has proved resilient since listing on the ASX. In turn, this has allowed the business to sensibly utilise gearing to generate sound returns on shareholder equity.
Given recent acquisitions have been partially debt funded, we expect that the net leverage ratio (measured as net debt/EBITDA) will approximate 2.1x at (financial) year end. We see this as towards the top end of management’s preferred gearing range. As a result, we are looking for management to sensibly strike the right balance between the payment of dividends and reinvesting retained earnings to drive growth, while also steadily de-gearing the business in the coming periods.
CKF is currently forecast to achieve an average normalized return on equity (NROE) of about 19% over the coming three years, which in turn drives our FY2019 valuation range of $6.30 to $6.50 per share.

Figure 3. CKF NROE profile, FY2014 – FY2020e.
Source: Clime, StocksInValue
While we expect CKF’s June full year results announcement to reflect steady aggregate growth, we are more excited about the long-term prospects for CKF’s multiyear store roll-out opportunity. When coupled with moderate growth in same store sales and likely incremental scale benefits, we believe CKF can generate double-digit earnings growth over the medium-term.
Although much remains to be executed, given a solid track record, a strong existing foundation and an experienced management team we believe CKF can potentially become a much larger business in the years to come.
Clime Group owns shares in CKF for and on behalf of various mandates for which it acts as investment manager. 
Adrian Ezquerro is a Senior Analyst and Portfolio Manager for the Clime Smaller Companies Fund.