Shares in Collins Foods (ASX:CKF) re-rated strongly following the release of full-year results in mid-June 2025. An improved outlook for group sales and growth plans in Germany have been the key contributing factors. The fundamentals have improved since recent times. Accordingly, we recently researched the Company in The Dynamic Investor to assess whether the shares present value at current levels.

About Collins Foods

Collins Foods is a Kentucky Fried Chicken (KFC) franchisee in Australia and Europe (Netherlands and Germany) with a total of around 386 KFC restaurants (285 in Australia). The Company is also a Taco Bell franchisee in Australia, with 27 restaurants. However, CKF is seeking to exit Taco Bell after a sustained period of underperformance, with an exit expected within 12 months.

CKF is the largest KFC franchisee in Australia. The KFC brand is owned globally by Yum! Brands. CKF’s franchises are held through individual agreements with Yum! Brands. CKF are required to pay Yum! Brands annual loyalty payments. KFC Australia is the main value driver for the Company, as it accounts for ~75% of group sales and a higher portion of overall earnings.

Key Fundamental Drivers

Improving Outlook for Group Sales

CKF’s trading update highlighted that Same Store Sales growth (SSSg) continues to improve as CKF cycles easier comparisons. This indicates that consumer demand for KFC in CKF’s regions remains resilient and now starting to improve. The first eight weeks of the six months to October 2025 (1H26) have seen SSSg of +1.6% for KFC Australia (-0.8% in the prior corresponding period (pcp)); -0.2% for KFC Netherlands (-2.3% in the pcp) and 1.3% in KFC Germany (-2.8% pcp).

Whilst this was weaker than market expectations, improved SSSg was reported across all regions compared to the 2H25. The positive SSSg trend reported in the 1H26 period to date is expected to accelerate over the course of the full year (FY26). This is likely to be driven by easing cost pressures in Australia, with volume and mix (units via kiosks/digital sales and family meals) expected to be a positive driver of SSSg.

CKF is continuing to cycle through challenging trading conditions, with productivity improving through a new program matching labour supply to volume demand. Having said that, the improvement is expected to be gradual and below the historical trend. Both the Australia and Europe regions to benefit from new store growth moving forward. To this end, CKF remains on track to deliver 28-30 new restaurants by 2028.

Margin Performance

CKF’s group underlying EBITDA margin improved by ~80 basis points in 2H25 (vs 1H25). This was driven by better SSSg, cost deflation across chicken and potatoes and operational efficiency. As a result, group EBITDA margin end FY25 30 basis points ahead of Company guidance.

KFC Australia will continue to benefit from deflation across some Cost of Goods Sold (COGS), in particular chicken and potatoes. Despite a weaker than expected trading update, CKF has provided FY26 underlying NPAT guidance for low to mid-teens growth compared to FY25. Consensus NPAT estimates for FY26 are at the top end of this range, at ~15%.

CKF’s guidance implies only ~10 basis points of margin expansion in FY26 vs 2H25 which appears conservative. While part of the expected EBITDA margin expansion in FY26 is attributable to COGS deflation, we note two measures underpinning expectations for a higher EBITDA margin: i) Productivity initiatives and ii) Continued kiosk rollouts in Australia. Aside from the rollout of kiosks driving greater sales (as they have a higher average order value), they provide an offset to wage cost pressures.

Balance Sheet Capacity to Fund Merger & Acquisition Strategy

The balance sheet remains in a strong position, with gearing (on a net debt to EBITDA basis) declining to 0.9x as at 27 April 2025, from 1.1x at the end of 1H25. Coupled with undrawn debt facilities of ~$168m, the balance sheet is well capitalised to fund Merger & Acquisition (M&A) activity, particularly in Germany where unit economics are favourable and where the Company is looking to build scale. To this end, KFC parent Yum! has committed to investing in Germany, with brand marketing, and is working with franchise partners across various initiatives to drive growth.

Fundamental View

CKF shares are currently trading on a 1-year forward P/E multiple of ~17.5x. The current multiple is undemanding in the context of an EPS growth profile of ~17% over FY25-28 on a CAGR basis. However, it is broadly in line with the long-term average. Further, the re-rating in the shares since the release of FY25 results reflects market confidence in the Company’s growth strategy, which is underpinned by the Yum!-supported planned expansion in Germany, where the store economics are strong.

However, the potential upside from this strategy (which is being factored into consensus earnings estimates over the medium) is not expected to materialise until FY27 onwards. To this end, we note that during the time that CKF have operated in Europe, scale and profitability have historically been elusive in the early years of operation. Further, the forecast group SSSg growth rate is still well below the levels needed to generate meaningful EBITDA margin expansion. Margin expansion may be need in order to offset any challenges in the planned store expansion in Germany.

Charting View

The rally in June resulted in CKF pushing beyond the resistance line (blue line) on good volume. It came back to test that line and is now trying to push towards $10 in the short-term.

 

Michael Gable is managing director of Fairmont Equities.

 

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