Sphera Franchise Group raised at HOLD, TP RON 21 - The ugly duckling is not turning into a swan anytime soon

To say that Sphera had some troubled times after the IPO in 4Q 17 might be an understatement. Its results started to disappoint immediately after the listing, mainly due to: i) declining margins, which dropped under the pressure of rising wages in Romania and volatility in the prices of chicken, and ii) weakness in the Pizza Hut business, as the delivery business has strong competition from independent food aggregators. Moreover, results were almost constantly at odds with upbeat statements from the former management, thus further compounding the negative sentiment towards the stock. The new management, in place since last May, is trying to change the business model in Pizza Hut, especially in delivery, and the expansion plan for KFC in Romania and Italy seems to go ahead largely in line with the agreements with Yum!. However, a turnaround for the Pizza Hut delivery business is uncertain, and the managements latest guidance on margins is very cautious. Thus, we do not see significant price triggers this year. We expect Sphera to pay dividends, but we see the implied dividend yields in low single digits. We reckon that the KFC business in Romania and Italy could support double digit sales growth rates, mainly on an aggressive expansion of the network, but this would also imply further pressure on margins until the new units are maturing. All in all, we are now rather neutral on the stock, thus we have a HOLD recommendation for the stock on a 12m cum-dividend TP of RON 21.