Is KFC operator Collins Foods Ltd looking finger-licking good?

Despite a disappointing set of recent results, could Collins Food Ltd (ASX:CKF) be a buy today?

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I recently ordered food from an exceptionally run KFC restaurant with the fastest service I’ve ever seen – not as fast as McDonalds, but very close. ‘Surely this must be an ASX-listed business?’ I thought. I found my answer on the proprietor’s board and yes, it was a KFC restaurant run by Collins Foods Ltd (ASX: CKF).

One restaurant isn’t a good reason to buy a whole business, but it was enough to spark another close look at Collins Foods, which reported its results to the market two weeks ago. Shares are down almost 25% since that date and the company looks pretty cheap, even if shares are still up 37% for the year.

Although shares fell I saw a number of positives with the result, including growing revenues and profit margins that expanded by 0.9% despite a competitive and cost-sensitive sector. Revenues rose around 2.4% (excluding the impact of a 53-week year in 2015), while profits jumped more than 20%.

Making the $$$

Collins generated just under $50 million in operating cash flows last year, of which $25 million was reinvested in the business, $11 million went to shareholders, $2 million debt was repaid, and the remainder kept as cash. It was a great cash performance and the company looks to be in a financially stable position, despite its $112 million in debt.

Management noted that margins were vulnerable to increases in key costs, especially labour, which may have been behind some of the recent negative sentiment. However, the company is no more or less vulnerable than it was before, investors just need to be aware what they’re buying.

Business prospects

With the recent acquisition of a stack of KFC restaurants in New South Wales and Victoria, Collins’ medium-term strategy is to consolidate these purchases while continuing to invest in its Snag Stand brand – the ultimate potential of which is an open question.

The performance of Australia’s Sizzler restaurants continues to decline, with same store sales falling almost 12%. Management seems happy to run the business for now, with no mention of a potential sale or closures. Be that as it may, the main story with Collins is its KFC restaurants, which are tracking well.

Trading at around 12 times earnings and paying dividends of 3%, Collins Foods is not expensive and indeed, is cheaper than similar franchise conglomerate Retail Food Group Limited (ASX: RFG). Indeed if I didn’t already own RFG, I could see myself picking up Collins Food shares, which look finger-licking good.

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Motley Fool contributor Sean O'Neill owns shares of Retail Food Group Limited. The Motley Fool Australia owns shares of Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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