Collins Foods (CKF.AX) is a restaurant operator and manager. While its core business is as Australia’s largest franchisee of KFC restaurants, it has recently begun building out KFC’s footprint in Germany. CKF also owns the Sizzler brand both in Australia and in Asia, though this business has been deemed non-core and is being progressively wound down in Australia. Collins’ growth is predicated on its KFC store roll out in Australia and Germany, with additional upside potential through acquisitions as well as the possibility of a second core brand being brought into the business.
Despite CKF’s strong share price performance, we continue to see upside in its clear and multifaceted growth strategy. The Australian market, though relatively mature, is not yet saturated. As a result, CKF will continue its store roll out in Australia which is expected to add 6-8 new restaurants each year in the medium term. In contrast, penetration of the KFC brand in much of Europe remains remarkably low. In Germany, CKF is expected to add 10 stores per year over the medium term as it builds out its footprint in advance of a larger scale European roll out.

Figure 1. CKF store network
Source: Company reports, Clime estimates

Its second path to growth is through acquisitions. Globally, the rights to the KFC brand are owned by Yum! Brands (YUM.N) but YUM is seeking to exit the day to day operations of all of its KFC stores outside of China. As a result, it is seeking to divest its remaining Australian restaurants, which currently make up >20% of the market. CKF has been selected as one of YUM’s preferred partners in future divestments, presenting a significant opportunity to acquire a large number of existing stores at relatively attractive multiples.
Finally, the wind down of Sizzler has led the group to evaluate bringing in a second core brand to improve diversification and open new growth opportunities. In our view, CKF will stay within the fast food segment of the market, possibly looking to existing global brands lacking an Australian footprint (such as, in Clime’s opinion, Taco Bell). We would expect CKF to find a suitable brand within the next three years, though to date nothing has been announced. In the meantime, Sizzler is providing cash flow without need for reinvestment, allowing CKF to divert capital to higher growth projects as it manages the brand’s declining importance to the overall group.
We believe CKF’s existing business remains attractive. It has proven to be a capable operator, adept at both managing existing stores and elevating new store profitability to its internal return targets. It has consistently improved its ROE through better asset utilisation, improving operational efficiency, and a diligent store refurbishment program. These initiatives, coupled with a predictable level of modest like-for-like sales growth, continues to drive organic earnings growth. Moreover, the balance sheet remains comfortably positioned with net debt/EBITDA of ~1.7x, strong cash flow conversion and internal funding capacity for the roll out, dividends and to an extent, potential M&A.

Figure 2. CKF revenue per store
Source: Company reports, Clime estimates

We currently hold CKF in the ASX model portfolio and across Clime’s Australian growth portfolios. It has performed well by continuing to execute on its strategy, finding attractive new markets to expand into, and opportunistically consolidating the domestic market. We believe CKF will continue to do so going forward, building a stronger and more diverse business with multiple paths to sustainable (and profitable) long-term growth.