What to do with Collins Foods03.11.2011

The Queensland based KFC franchisee, which we covered in Issue 4, delivered a significant profit downgrade just three months after its initial public offering, having raised a touch over $200 million. At $1.20, its shares (ASX code CKF) are now down almost 25 per cent this week and are a shadow of their $2.50 listing price.

Collins Foods said that the reason for the downgrade was the “fragile consumer confidence”, but this flies in the face of the reason we liked it.  The UBS broker report released prior to the float said that Collins provided “exposure to the defensive fast food segment”. “Defensive against what?” you would have to ask after this announcement.

Big funds have stakes in Collins. Those that hold more than 5 per cent are MLC, AMP, BT, Aviva, Pengana and Colonial.

One thing is for certain. The announcement is certainly a black mark against private equity. Pacific Equity Partners originally sold its 52 per cent holding into the IPO. It is vulnerable to accusations that it artificially pumped earnings up to the point where it was not possible for Collins Foods to meet prospectus forecasts. How much could things have changed in only one month?

After the downgrades, the stock trades on a current PE multiple of 6 times and a dividend yield of 7 per cent. As one invested fundie said to me: “The big money is made when people panic and KFC isn’t going out the back door. Buy the fear, buy the fear.”

He didn’t say whether he was topping up his holding though. Buying now is an option for the brave, and there is every possibility that this is a buying opportunity.

We’ll see what our fund manager, “The Idle Speculator” thinks in the upcoming Issue 5 on 17 November, when he comes up with his first two stocks for the portfolio.

About the Author

Caroline Mark

Caroline is the publisher of Under the Radar Report. She has a diverse background, from producing financial publications, to fundraising and marketing.

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