Fast-food operators are likely to face some headwinds over the coming year, broking house Morgans says, but there is still room for savvy operators to grow.
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Share price gains still on the table
Morgans has named two companies as their top picks in the sector, with share price targets that imply solid gains for investors.
But the broking house warns that the consumer outlook is continuing to weaken, with interest rate rises at the centre of that theme.
Morgans said:
The RBA is back at 4.35% after three rises this year and looks set to hike again in late September. Consumer sentiment has dropped to 84.4, below neutral and weaker than a year ago, with real incomes still going backwards. We expect FY27 to be a tougher year for the consumer than FY26.
The broker said that for fast-food operators, growth has to come from increased sales, not price, "because a household absorbing a fourth rate rise will likely trade down or out if prices rise further again''.
They added:
Operators that lift revenue without leaning on price can hold margins as the cost base inflates, while those still taking price to cover soft comps risk losing volume. The sustainable way to hold margin is to grow the top line on traffic, attach and mix behind a value proposition strong enough that customers keep coming without price cuts.
Broker names its two picks
Morgans' top pick in the sector is Guzman Y Gomez Ltd (ASX: GYG), with a price target of $31 against $25.04 at the time of writing.
They said:
It is the highest-quality operator in our coverage, with strong unit economics and ambitious but achievable FY30 targets. It took the least price and still grew same store sales 5.3%, almost all on traffic, and its fresh, protein-led menu aligns best with consumer trends. Management has commenced the buy back and, given its strict capital allocation and ROI hurdles, we view this as a clear demonstration of where it sees value. The next catalyst is the quarterly trading update in October.
Second in line is Collins Foods Ltd (ASX: CKF), with Morgans having a price target of $10.60 against $7.93 at the time of writing.
Morgans said re Collins Foods:
In our view, CKF screens cheap and holds a strong value proposition, given KFC's well placed value menu in a tough consumer environment. Kwench and daypart expansion into late-night and breakfast add further opportunity to attach and increase traffic. The growth opportunity in Germany is not priced in by the market, and we see the midpoint of its store opening target (45-90 by FY30, without acquisitions) as achievable.
Morgans has a hold rating on Domino's Pizza Enterprises Ltd (ASX: DMP) with a price target of $20 compared to $19.45 at the time of writing.
