The S&P/ASX 200 Index (ASX: XJO) stock Collins Foods Ltd (ASX: CKF) has seen investors go lukewarm on its short-term growth. But, the current valuation and expectations of a medium-term recovery could make this an appealing contrarian opportunity.
For those who don't know, this company is a large KFC franchisee in Australia and Europe. It also has a small but growing Taco Bell network in Australia.
The company has struggled in the last few years, first because of the inflation of its costs and now because of the impacts of a high cost of living on customer demand.
While the business isn't guaranteed to recover to former profit margins, brokers are optimistic that the company's profit can substantially improve in the next few years. Let's look at what brokers are attracted to.
Bullish view on this ASX 200 stock
According to a collation of analyst opinions by Commsec, there are nine analysts who rate Collins Foods shares as a buy, including UBS.
UBS has a price target of $9.80 on the KFC operator. A price target is where the broker thinks the share price will be in 12 months from the time of the investment call. They don't have a crystal ball, but a price target can indicate how bullish an analyst is about that business.
With that price target of $9.80, UBS is implying that Collins Foods shares could rise by 12% from here during the year, plus any potential dividends.
UBS believes the ASX 200 stock's like-for-like sales in the second half of FY25 could accelerate, partly because it will be cycling against easier comparable sales in the last 19 weeks of FY25.
The broker also noted that Collins Foods beat the top end of its operating profit (EBITDA) margin guidance in the first half because the company focused on profitable value and innovation offerings. UBS floated the idea that beating guidance could occur in FY25, too.
Next, UBS suggested that KFC Australia's costs could benefit from food deflation, creating less challenging cost headwinds in the second half of FY25. Due to the rolling nature of contracts, the broker sees scope for this "to continue or potentially accelerate into FY26".
The broker is also pleased to see the ongoing growth of sales via digital channels in Australia. In the FY25 first-half result, digital channels made up 35% of sales, compared to 28% in the first half of FY24. This is driving higher profit margins through an increased average order value (AOV) and an improved product mix.
Collins Foods share price valuation
UBS is forecasting that the ASX 200 stock's earnings per share (EPS) could grow by 43% in FY26, 22% in FY27, and 17% in FY28.
In other words, the company is expected to achieve significant profit growth in the next few years. The Collins Foods share price is valued at just 16x FY26's estimated earnings, with further profit growth projected after that. It also has a projected grossed-up dividend yield of 4.75%, including franking credits.
