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As a part of its global refranchising initiative, Burger King Worldwide (BKW - Analyst Report) recently divested 41 company-owned restaurants in Singapore to Rancak Selera Sdn Bhd – a part of Ekuiti Nasional Berhad’s portfolio of companies and the present franchisee of Burger King in Malaysia. The financial terms of the deal were not disclosed.

Per the transaction, Rancak Selera acquired the full stake in Burger King Singapore Pte Ltd. It also currently owns 74.1% equity in the Malaysian franchisee for Burger King. Rancak Selera will act as Burger King’s master franchisee and developer to boost the brand’s presence in Singapore and Malaysia over the next 20 years.

Rancak Selera shares a long standing relationship with Burger King since its launch in Malaysia in 1997. Since then, Rancak Selera has successfully enhanced the brand’s presence across the country to as many as 32 outlets.

Armed with the strong know-how of local food habits, the franchisee is also hopeful that its collaboration with a global brand like Burger King would help spread its menu offering successfully across Malaysia and Singapore.

The latest deal affirms Florida-based Burger King management’s intent to make Singapore and Malaysia among the prime markets for international expansion considering its emergent economy. According to a global market research company Euromonitor, Singapore recorded gross domestic product (GDP) growth of 5% in 2011 on the top of a robust GDP growth of 14% in 2010, leading to higher consumer confidence.

Increasing disposable income has enabled Singaporeans to spend big on branded food items. It is being witnessed that the young as well as the emigrant population in Singapore are more inclined towards western fast-food chains. We believe that Burger King seeks to fully capitalize on this trend.

Rancak Selera also commented that Singapore’s Food & Beverage (F&B) market currently hovers around SGD9.01 billion (RM22.6 billion) and it will remain a flourishing category in Singapore over the next couple of years.

In order to attain a 100% franchised model, Burger King remains focused on the strategy of re-franchising its company-owned units. We believe re-franchising a large chunk of its system will provide another opportunity for margin expansion. Also, the company’s effort to reduce its capital requirements will ensure steady free cash flow generation. Presently, nearly 94% of its restaurants are owned and operated by independent franchisees.

However, the market is not free from competition. Burger King will likely face intense competition in that region from its peers McDonald’s Inc. (MCD - Analyst Report) and Yum! Brands Inc. (YUM - Analyst Report). McDonald’s is a prominent name in Malaysia and Singapore with a wider scale of operation.

Furthermore, a sluggish macro environment acts as another short-term deterrent. According to the Monetary Authority of Singapore, the GDP growth is expected to be slow to 1–3% in 2012.

Burger King currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We maintain our long-term “Neutral” recommendation on the stock.

 

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