History KFC Holdings MBhd First

After a successful restructuring exercise, KFCH has emerged as a strong player in the Malaysian corporate world with a high reputation for excellent products, efficient friendly service and financial strength. Indeed, KFCH is the only KFC restaurant operator in the world whose Western Quick Service Restaurant market share is greater than that of McDonald’s.

KFCH is part of QSR Brands Bhd (QSR Brands) .QSR brands is a leading and fully-integrated quick-service restaurant enterprise and the local franchisee and operator of the KFC and Pizza Hut restaurants. QSR Brands is a subsidiary of Kulim (Malaysia) Berhad which conglomerated focusing mainly on palm oil operations, oleochemicals, biodiesel production and quick service restaurants. Besides that, Kulim (Malaysia) Berhad is under Johor Corporation as well.

The first KFC restaurant in Malaysia was opened on Jalan Tunku Abdul Rahman in 1973. The Company was operating 475 restaurants across Malaysia, 77 stores in Singapore, 9 restaurants in Brunei and 72 restaurants in India as of December 31, 2009,. The Company had a total of 43 RasaMas restaurants in Malaysia and Brunei and 35 Kedai Ayamas stores across Malaysia in 2009. On December 15, 2009, the Company had acquired the entire issued and paid-up capital of Rasamas Terminal Larkin Sdn Bhd and Rasamas Melaka Sdn Bhd.

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When KFC Holdings (M) Bhd is going successful in fast food industry, it now is more concern toward to charity and community program. In year 1995, KFCH initially launched a “Projek Penyayang” but now already become a part of “Tabung Penyayang. There are more than 66 charitable homes and institutions get the benefit from their fund around Malaysia. In that year, the company also implemented a special programme that each home will be given a meal treat of the finger licking’ good fried chicken every quarter of the year. The ‘Tabung Penyayang’ which launched in year 1997 helped a lot of orphans, disabled, homeless and needy children around Malaysia. They get fund from the company’s revenue from the collection of 10 cents from the sale every of Chicky Meals ‘Tabung Penyayang’ KFC Collection Box as an extension to the Tabung Penyayang KFC programme in August 1999. Collection boxes are placed at all KFC restaurants so that customers can contribute and be part of this charitable effort. ‘Tabung Penyayang’ has helped strengthen even more our relationship with the Malaysian public in the charity program.

Financial Performance of KFC Holdings (M) Bhd

According to the RHB Research Institute Sdn Bhd on 23 June 2010 of Corporate Highlight about the share split, bonus and warrant issue information, the major shareholder is QSR Venture with holding 50.30% share. The second major shareholder is Lembaga Tabung Hasil with 24.80% while Airsaig Asean Fund also holds 6.9% of share. The share price of KFC (3492) in KLSE is RM10.50 and the volume is 294,000 in last update on 13 August 2010 at time17:10:13.

KFC Holdings gained RM167 million and make the profit of RM320, 000 until 30th September 2009. There have a rise of 6% in fast food restaurant’s profit if compare to previous year’s profit. The KFC Company reported revenues of RM2, 179.79 million during the fiscal year ended December 2008, and an increase of 25.97% over 2007. The operating profit of the company was RM 175.02 million during the fiscal year 2008, an increase of 8.08% over 2007. The net profit of the company was RM 118.54 million during the fiscal year 2008, an increase of 13.68% over year 2007.

The total asset either current asset or non- current asset are increasing from year 2008 to 2009. For the equity part, the retain earning of company increasing RM40, 513 to year 2009. The company still keeps it as reserve for emergency use. The short term loan had been decrease RM20, 000 from year 2008 to 2009. It is a good sign to reduce of borrow loan. But the total equity and liabilities increase from RM603, 539 in year 2008 to RM626, 232 in year 2009. There is an increase of RM22, 873 within one year.

KFC Holdings (Malaysia) Bhd. has announced that the company will give a final dividend of RM 0.16 less 25% Malaysian income tax per share for the year ended 31 December 2009. The dividend paid on 27 May 2010. 

In next year , the KFC Holdings Malaysia Bhd plans to invest RM 45 million to expand at least 20 new outlets in 2011 .Of the 20 outlets nationwide, 12 outlets will be under the drive-thru concept. In this year, KFC also will launch a new menu- Hot & Spicy menu in Kuala Lumpur in coming 3 August. The company was expecting has about increase 10 % sales On the new Hot & Spicy Shrimp menu, the company was expecting to drive its during the promotion period from 3 August to 30 September 2010. Besides that, KFC Holding wishes to expand the sausage capacity as it Port Klang plant to double digits sales growth at the end of year 2010 from the currently 500 tonnes to 1000 tonnes.

Task 1

KFC Holdings (M) BHD has expanded their business aggressively in these few years. There are lots of new branches being set up in Malaysia. Therefore, the management team also exposed to several new challenges in managing or maintaining their profit level. After viewing the information about the company, we found out that the company has well utilized its labor force, machinery, and managerial skill in expanding their business. There is no doubt that they have implemented their plan very well in managing the company because it is easily for us to see that their outlets have been built up in a very fast rate. However, we also found out that there is an unfavorable issue that has occurred in the company which is, the profit of the company is declining slightly in the last few years. This reduction in the net profit is a big deal that the company should pay more attention in solving it in order to place the company in a well situation. But, what is the main reason that caused a company with a very nice performance and a well management team to encounter with such problem? Since the management team of KFC Holdings (M) BHD is well managing, they should have an increasing net profit instead of a decreasing net profit throughout the years. However, after a deep consideration on this unfavorable matter, we have concluded that the company should reduce its cost in order to shift away from this situation and thus, increase their profitability. So, we should primarily focus on the cost issue to help the company to overcome this problem.

So, we suggest the company to invest in a new asset which can eventually help the company to save their cost. Since the cash flow of the KFC is tighten up by its cash flow, a high-tech machine likes ice cream maker, which require a large amount of fund for the initial investment is definitely not suitable for the company. We should create a product that can help the company to save up their cost and which will not become a burden for the company. After a discussion, we suggest that the new asset that the company should invest in is a new design of sauces container which can be a replacement for the bottle of sauces that the company is currently used. As we know, the KFC Holdings (M) BHD normally served the customers with two kinds of chili sauces and tomato sauce. So, what is the problem with their sauces? Normally, they will serve the customer with their sauces, either chili sauce or tomato sauce in the original bottle of their supplier. Apart from the problem of cost, as the company serves the sauces in the form of bottle, it will actually bring a lot of inconveniences to the company. It is because each bottle of sauces requires the firm to leave out a space to keep the sauces in a safety place which will cause the firm to spend a portion of fund to acquire a store. The money that the company used in maintains the condition of store will increase the cost of the company indirectly. So, back to the main reason of our problem, the bottle that the supplier used in filling up the sauces actually will cost the company more due to its high cost in producing it. As we know, the purpose that the supplier use a glass bottle to fill in the sauces is to longer the expired date of their product. However, it will also increase the cost of firm to acquire such product because the material, which is the glass bottle that being used by the firm to produce it is very high.

So, we suggest the company to invest in a new design of sauce container which can eliminate the use of the glass bottle in their retail shops. They can actually save a lot of money from using the well-designed container. The design of the container of the sauces allowed the firm to fill up the sauce in it without using any bottles, which can eventually reduce the cost of the firm. We will design the container in a very creative shape and it will require the customers to squeeze on the plastic form container in order to get the sauces. It will not only save the cost but also increase the customer’s favorable over this new product. Furthermore, the cost to invest in this new asset will not be very high because it is being created in the high quality plastic form. However, we will require a steel stand to support three of the sauces plastic containers. Although the container is in the plastic form, but each of the containers can fill in about ____ml of sauces which require a stable stand to support its heavy weights. Not forget to mention again, the company will serve the customers with three kinds of sauces which mean there will have three containers being supported by the steel stand. Well, we also know that the cost of obtaining a stand that is made up by steel is not that cheap. However, it will also help the company to save a lot of cost in a long term view. Besides that as the container can be refill for many times, the company can require the supplier to provide the sauces in a plastic form which can eventually eliminate the higher cost of obtaining it in a glass bottle form. Moreover, by obtaining the sauces in plastic form from the supplier, the staff can refill it into the new designed sauce containers easily.

Frankly, the cost of obtaining the sauces which is packaging in plastic is definitely lower than the cost to obtain the sauce which is packaging in a bottle. Well, we know that the supplier of the sauce, LIFE brand sauce is a _____ with the company which has already provided the sauce to KFC in a lower price. However, the reduction in the cost of packaging the sauce will then reduce the cost for KFC to obtain the sauce. The KFC Holdings (M) BHD can still get the sauces from its supplier in a rate that is far lower than before. Besides that, with the creativity in the design of the container, the company can actually attract more customers into it indirectly. We have confidence that the creative design of the container will attract the attention of customer, especially kids. This is one of the ways to increase the sales and to ensure that the customers will consume in KFC again. Furthermore, we can see that the stolen case can be happened easily if the company served the sauce in a bottle because the customers can get it easily without noticing by the workers. Customers who have the incentive in stealing it will find that it is not hard to be done if the sauces are being served in a glass bottle because they can just put it in their hand bag after dining in the retail shop. So, the stolen cases can be prevented if the company served the sauces in the well design container because the customers do not have a container to fill in the sauces. Thereby, increase the profitability of the company.

Replacement Asset

Installed cost per outlet

Cost of new asset (380+10950) 11,330

Installation cost 100

Total installed cost 11,430

After tax from sale of old asset 27,375

Change in net working capital

Current asset 39,570.53

Current liabilities 3,867.37

Total changes 35,703.16

Initial investment 19,758.16

Installed cost per 475 outlets

Cost of new asset (11,330 x 475) 5,381,750

Installation cost 47,500

Total installed cost (11,430 x 475) 5,429,250

After tax from sale of old asset (27,375 x 475) 13,003,125

Change in net working capital

Current asset 18,796,000

Current liabilities 1,837,000

Total changes 16,959,000

Initial investment 9,385,125

Analysis of Replacement Asset

The price for a bottle of sauces either chili sauce or tomato sauce will be RM2.50. We assume that a KFC outlet will used up ten bottles per day which cost RM75 (3 x RM2.50 x 10). Therefore, it will cost RM27375 per annually for the company to acquire the sauces from the supplier. For 475 outlets in Malaysia, it cost up RM13003125. However, by replacing the bottle with sauces container it will only cost the firm with the total amount of RM11430 per year which means RM5429250 for 475 outlets. From the RM11430, it consists of RM380 of three containers for sauces, RM10950 for the sauces which is packaging in a more cost efficiency way, and the RM100 of the installation cost for the containers. Assuming a package of sauce will cost the firm RM3 and the firm will consume ten packages per day for a year. Based on the annual report of KFC Holdings (M) BHD, the changes in net working capital is RM16959. With the entire figure above, we can generate the initial investment of RM 19758.16 per outlet and RM 9,385,125 for 475 outlets.

Operating Cash Flow

(Present)

2010 2011 2012

Revenue 77635000 85710000 88801300

Expenses 3327300+13003125 16757925 16900425

(16330425)

61304575 68952075 71900875

(Proposed)

2010 2011 2012

Revenue 77635000 85710000 88801300

Expenses 8756550 9184050 9326550

68878450 76525950 79474750

With present asset 2010 2011 2012

Revenue 77635000 85710000 88801300

Expenses 16330425 16757925 16900425

EBIT 61304575 68952075 71900875

Taxes (40%) 24521830 27580830 28760350

NOPAT 36782745 41371245 43140525

Operating cash inflow 36782745 41371245 43140525

With proposed asset

2010 2011 2012

Revenue 77635000 85710000 88801300

Expenses 8756550 9184050 9326550

EBIT 68878450 76525950 79474750 Taxes (40%) 27551380 30610380 31789900

NOPAT 41327070 45915570 47684850

Operating cash inflow 41327070 45915570 47684850

Initial investment

RM 9,385,125

Cost of capital

11 %

Cash flow

Year 1

RM7573875

Year 2

RM7621375

Year 3

RM7621375

NPV

RM 9196548.45

IRR

61.87 %

Cost of debt

50% from retained earning ( RM4700000)

50% lending from bank (RM 9,385,125 – 4700000) RM 4685125

Cost of retained earnings 30%, weighted 0.50

Cost of debt, 61.81% (similar with IRR), weighted 0.50

WACC = (cost of retained earnings x weighted) + (cost of debt x weighted)

= ( 30% x 0.50) = (61.81% x 0.50)

= 15% + 30.91%

= 45.91%

IRR > WACC, accept the asset

61. 81% > 45.91%

Financial leverage

Total dividend to shareholders : RM32715000

Total dividend to common stockholders : RM23793000

Total dividend to preferred stockholders : RM8922000

Number of shareholder: 178,275,000

Income statement Of Leverage (RM’000)

sales revenue

77,365

Less: cost of good sold

Gross Profit

77,365

Plus: Other income

35,598

Less: operating expenses

33,273

Earnings before interest and taxes (EBIT)

79,690

Less:Interest

–

Net profit before taxes

79,690

Less: Financial cost

1,805

Profit before tax

77,885

Less:Taxes

4,669

Net profit after taxes

73,216

Less: Preferred stock dividends

8,922

Earnings available for common stockholders

64,294

Earnings per share (EPS)

32. 43

Income statement Of Leverage (RM’000)

sales revenue

77,365

Less: cost of good sold

–

Gross Profit

77,365

Plus: Other income

35,598

Less: operating expenses

33,273

Earnings before interest and taxes (EBIT)

79,690

Less:Interest

–

Net profit before taxes

79,690

Less: Financial cost

6,490.125

Profit before tax

73,199.875

Less:Taxes

4,388.333

Net profit after taxes

68,811.542

Less: Preferred stock dividends

8,922.000

Earnings available for common stockholders

59,889.542

Earnings per share (EPS)

33. 59

Task 2 Merging

Benefit of merging

Dutch Lady Milk Industries Berhad is the company that we choose to merge together with KFC Holdings (M) Berhad. The reasons that we want to merge this two companies together are because this merger will provide a lot of benefits to both of the companies. However, we will discuss about the type of mergers that we used in merging this two companies together first. As what we know, there are four types of mergers which are horizontal merger, vertical merger, congeneric merger and conglomerate merger. After a deep consideration about the condition of these two companies, we have suggested both of the companies to merge through vertical merger. So, what does a vertical merger means? It is a merger in which a firm acquires a supplier or a customer. It is normally happened between two companies that producing different goods and services for one specified finished product. Since the Dutch Lady Milk Industries Berhad is a company that mainly produces natural and nutritious products that people are pursuing nowadays. So, we hope that the merger between these two companies can bring out a new product that is primarily focus on the health of the people.

So, we will discuss the product that these two companies will produce in more details after the successful of the merger between them. Firstly, KFC Holdings (M) Berhad which is a fast food restaurant will acquire the natural and nutritious products such as milks or yogurts from Dutch Lady Milk Industries Berhad . After that, it will introduce a new combo set which comes together with the healthy products that is provided by Dutch Lady Milk Industries Berhad. This idea comes out from our minds because we know that people are showing their great concerns on the problem of healthy nowadays. Normally people will think that having fast food will affect our healthy and adults will inhibit their children from eating fast food as a result. This effect will definitely affect the sales of KFC Holdings (M) Berhad indirectly. So, we must discuss a method to solve this problem upside down. After configuring the factor that caused this problem to arise, which is the people’s mind set of “fast food will bring negative effect to our health”, we have also come out with a well solution. The solution is that we will acquire the healthy products from Dutch Lady Milk Industries Berhad and combine with the products of KFC Holdings (M) Berhad which can reflect a good image that the combo set is something good to our health.

Furthermore, we have think of two kind of new combo sets after the merger which one is mainly focus on adults and another set is focus on kids. Firstly, we will acquire the package milks from the Dutch Lady Milk Industries Berhad and combine it with the kid meals. Apart from that, we will acquire the milks not only in one flavor but in three different flavors which are original, strawberry and chocolate. It is because we know that the kids nowadays might have different demands on the drink choices. Some of them might show preferences over strawberry flavor and some others might show their preferences on chocolate. So, it is good to have more choices for them to choose in order to prevent any unwanted consequences. As what we know, milks are the best nutrition that everyone needs to maintain their health. So, the parents might not be so aggressive in inhibiting their children from eating the fast foods if we combine it with milks. Then, the sales in KFC Holdings (M) Berhad will boost up greatly as a result too. Besides that, we will also combine the three flavors of milks with the normal sets in KFC Holdings (M) Berhad. However, we will also provide the yoghurts as a dessert in the combo set. There are so many flavors of yoghurts that are provided by Dutch Lady Milk Industries Berhad such as aloe Vera, blackberry, strawberry or mix fruits. Yogurts has provided a lot of benefits to people such as preventing yeast infection, strengthening immune system, enhancing digest system and relieving ulcers. Furthermore, people are showing their great concerns on their weight nowadays, especially girl. So, having a yogurt right after their meals can enhance their digestion system which can help them to maintain their weight and health indirectly. So, we have confident that this combination of normal set with yogurt will bring out a good response from the customers.

Well, we will discuss in details about the benefits that come along with the vertical merger between this two companies. The benefits from the merger are:

– Increased managerial skill or technology

– Increased the competitiveness in the market

– Growth or diversification

– Synergy

1. Increased managerial skill or technology

A proper merger can enhance the performance of the company when a target company can provide the managerial personnel or technical expertise needed by the acquire company in expanding their business. Sometimes, a firm might fail to participate in a great opportunity in expanding their business due to the deficiencies in certain areas of management or an absence of needed product or production technology. As in our suggestion, the Dutch Lady Milk Industries Berhad will provide some healthy products such as milks and yogurts to the KFC Holdings (M) Berhad which will then produce a nice healthy image to the public. Besides that, the merger of two companies can improves their ability in research and development as both of them can spend a huge amount of money in such process. This will eventually improve the quality of products for the customers and increase the profit for both companies. Both of the companies can actually cooperate in carrying out a research in how to enhance the quality of foods that are expected by the customers. After the merger, they can carry out the research together at a cost far more lowly than other individual company. This is the benefit for a merged company as they can keep improving their products and gain sales from it. Furthermore, by acquiring the managerial skills from both of the companies, they can actually share their opinions or suggestion on how to improve the quality of products and boost up the sales indirectly. Normally, different people will have a different view on something, thus, both of the companies can gain different suggestions and think of a best way to deal with the problem. Thereby, the problem that faces by the company can be solved faster and easier. There is no doubt that a merged company will have a better managerial personnel or technical expertise in managing the company.

2. Increased the competitiveness in the market

We can easily see that a merged company can increase their competitiveness in the market when compare to their competitor. It is because that the merged company can gain the asset, skill, technology of the target market which will increase their potential in gaining benefit over their competitor. Besides that, their market value will also increase significantly as a result. As in our example, the KFC Holdings (M) Berhad can gain benefit from the healthy image which is being created by the Dutch Lady Milk Industries Berhad. People will change their mind concept towards the fast food due to the healthy image of those natural and nutritious products provided by the Dutch Lady Milk Industries Berhad. Furthermore, Dutch Lady Milk Industries Berhad can also gain the benefit of the increasing in their sales. Apart from that, they can provide customers with a wide range of services by merging. Nowadays, people are looking for a company that can provide them better services just like what the KFC Holdings (M) Berhad do, such as provide them a product which exceeds what they expected the company can provide. Therefore, the merge company can gain advantages over other company which will help them to hold existing customers and attract new customers into their company.

3. Growth and diversification

A proper merge between two companies can help both of them to fulfill a desire rapid growth in size or market share or diversification in the range of their products. Normally, a company will need to pay its supplier the cost to acquire the materials such as the cost of materials or any other extra charges that being charged by the supplier in processing the transaction. Sometimes, the cost for acquiring the materials can be a big burden for the company as it will reduce the revenue of the company. In our example, after the merged, the KFC Holdings (M) Berhad is free to get the products at the base cost and does not have to pay any extra charges to the Dutch Lady Milk Industries Berhad who is currently looking to make a profit from the sale. This allows the company to have less money tied up in production of a good and will increase their revenue. Besides that, the money that being saved up from the cost of material can actually use by the company in expanding their business or acquiring another asset that is useful to the operation of the company. The company should use the money that is saved from the materials wisely in order to achieve the target of the company which is fulfilling a desire growth. Moreover, the merged company can actually fulfill the target if they invest the money in a profitable investment or use it to extend or expand its product line. By doing so, they can actually experience a rapid growth in their sales and increase the total revenue and net income. Besides that, the growth of the business after merging might remove or scare a potential competitor off. Therefore, the merged company can sustain in that industry with its powerful strength in the future.

4. Synergy

The synergy can be considered as the economies of scale that results from the merged company’s lower overhead. The economies of scale achieved from lowering the combined overhead increase the earning of the merged company to a level greater than the sum of the earning of each of the independent company. So, what does economies of scale means? An economy of scale is a common thing that applies to most of the company in the market. All of the companies will try their best to strive for economies of scale which is, the average cost incurred in manufacturing a product can be reduced if the company requires a large investment and output. So, when two companies are being merged together, the total output increases can benefit them through economies of scale. When raw materials are purchased in large amount or quantities, the merged company can actually get a huge discount on their purchase. As in our example, after the merger, the KFC Holdings (M) Berhad will acquire the products such as milks and yoghurt from the Dutch Lady Milk Industries Berhad and comes out with a new combo set. The product demanded from KFC Holdings (M) Berhad can actually increase the sales of the Dutch Lady Milk Industries Berhad. Therefore, they need to produce the milks and yoghurt in an even large quantity than before in order to produce sufficient quantities that are required by the KFC Holdings (M) Berhad. So, have to get more raw materials in processing the products and they will experience the benefit gained from the economies of scale in the end. Lastly, actually both of the merged company can gain benefit from such merger because the KFC Holdings (M) Berhad can acquire the products at a cost that is far lower than original and the Dutch Lady Milk Industries Berhad can experience a significant increase in their sales. It has shown that a proper merger will benefits both company and increase their profitability.