Is Johor Corp underpricing KFC in its delisting?

Nobody will overprice a delisting, if they can. Johor Corp and partners are proposing a buyback exercise for KFC Malaysia at RM4.00 per share hence the entire exercise pricing KFC at RM3.3 billion. As a shareholder, I am trying to look at it realistically. The points raised by minority shareholders are very valid as KFC's share price has not risen much whereas over the last 12 months, other good quality consumer stocks were having sort of a run. To add to that, as a double whammy, KFC did not pay any dividends due to the prolonged delisting exercise.

Hence, shareholders of KFC are holding the shares without getting any payback for a longer period than expected while seeing other shares in the same space increased in value. Nevertheless, let's look at the company objectively besides KFC being just the strong franchise name over the years.

As you can see from above, while revenue, net cash from operations and net profits have been growing steadily, KFC Malaysia has been reinvesting as well. As a result, its free cashflow is not something to shout about. The debt situation faced by Johor Corp has caused it to declare dividends to reduce the burden of KFC Malaysia's ultimate parent. As a result, dividends have increased steadily as well while its borrowings at the same time increased as well. The multiple for cash / borrowings has deteriorated from 0.69x in 2008, the time when Johor Corp just managed to control KFC to 0.40x in 2011.

While the KFC brand name is good and still has room to grow, I think the comparison against other consumer stocks currently is not justified. Competition is greater today and it is not that its growth will be fantastic. The pricing provided for KFC is around 22.5x PE for 2011's income. Even if I think it is slightly underpriced, as a shareholder, I would be agreeing to the delisting. Remember, KFC Malaysia at the end of the day is still a franchisee.