Analysts said there were growth prospects in Indonesia and the acquisition looks attractive value-wise. The deal could increase the fair value of Burger King India by Rs 25 apiece, they said. But for now, they have kept the price targets unchanged.
According to the deal, Burger King India would buy 65.79 per cent stake in Burger King Indonesia from F&B Asia Ventures, which holds 83.32 per cent stake in the promoter of Burger King India, QSR Asia. Thus, it would be a related-party transaction that would require a nod from Indian minority shareholders for the deal to go through.
The remaining 19.21 per cent stake would be bought from the second partner, Mitra Adiperkasa, an Indonesian retailer that holds 34.21 per cent. Since Burger King would also be infusing $40 million in Burger King Indonesia for expansion, Mitra’s stake would fall further in the company.
Kotak Institutional Equities said the transaction would help F&B Asia monetise its 66 per cent stake in Burger King Indonesia, while diluting Burger King India that is trading at a rich valuation of 47 times FY23 pre-Ind-AS 116 EV/Ebitda.
“Value creation for minority investors is contingent on benefits of cross-learnings and cost synergies (sourcing + tech investments), and subsequent re-rating of BK Indonesia under BK India, especially in view of the valuation gap (partly attributable to opportunity size),” the brokerage said.
Analysts said Indonesia’s demographic profile was quite similar to India’s and that the geography offered higher growth prospects. Burger King Indonesia’s profitability profile, they said, was a tad better than Burger King India on account of lower rent and lower delivery commissions. What could drive Burger King Indonesia’s growth is the expansion to 225 stores by March 2023 and 330 by March 2026, from 174 now; the launch of BK Café and an augmentation of the chicken menu, analysts said.
“BK Indonesia’s increased focus of full service drive thru (FSDT) will aid margins as these stores offer higher margins than mall stores and have a lower payback period. BK Indonesia also plans to introduce Breakfast and BK Café in Q4CY21 which will aid the sales of FSDT as they operate 24×7. We believe valuing BK Indonesia at 25 per cent discount to FY23 EV/Ebitda of Burger King India and accounting for 21 per cent of equity dilution at Rs 160 can provide an increase in fair value by Rs 25 per share,” PL said.
Nirmal Bang said it would wait for the final outcome of the proposed acquisition of BK Indonesia, before making any changes to earnings, target price and recommendation. “Even as we appreciate the growth opportunity, valuations are steep in the context of weak return profile,” Kotak said, while suggesting a sell rating on Burger King India.
said the deal would imply a dilution in excess of 20 cent. But on a 2019 and 2020 basis, its incremental contribution to Burger India’s Ebitda would be over 80 per cent, it said, implying the deal is expected to be accretive on a per-share earnings basis.
BK Indonesia is the second largest QSR brand in Indonesia, the fourth most populated country. About 60 per cent of the population is under 35. On concluding the deal, Burger King India will have exclusive rights to operate the Burger King franchisee in Indonesia till 2039. Burger King will be entitled to a 90-day exclusivity period to explore, conduct due diligence and negotiate the proposed transaction, after which the final binding offer for the acquisition will be made.
“The management pegs FY23 EV-Ebitda to be in single digit for the target against 26 times for BK India — the favourable valuation-arbitrage (assuming the deal is equity-funded at, say, 15 per cent below current market price) would tilt the scale in Burger King India’s favour from a per-share earnings perspective. The key challenge in this, to us, could be the way two geographies in high growth phase with evolving store formats are handled,” JM Financial added.
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