Oppenheimer Now Sees Likelihood Of China Separation At Yum! 'Very High'

• Yum! Brands, Inc. YUM shares have plummeted 16 percent since September 16, and are trading significantly below their 52-week high of $95.
• Oppenheimer’s Brian Bittner maintained an Outperform rating on the company, with a price target of $94.
• The appointment of Keith Meister to the Board could be a major catalyst for a China separation, Bittner mentioned.

Yum! has elected Keith Meister, the founder of Corvex, to its Board of Directors. “Given his board presence and YUM’s strategic option review, we believe the probability of a China separation is now very high,” analyst Brian Bittner said.

Bittner mentioned that the bear case is $60 per share. For the company’s China business, a downside to consensus EBITDA of 25 percent has been assumed, along with a 6x multiple. For the franchised business outside China, in-line EBITDA estimates and a 10x multiple has been used.

The base case is $89 per share, the analyst stated. For China, Oppenheimer’s 2016 EBITDA estimate and a 10.5x multiple has been used. For ex-China franchised business, in-line EBITDA estimates and a 13.5x multiple has been assumed.

Bittner added that the bull Case is $112 per share. For China, an upside of 18 percent to China EBITDA has been assumed and a 15x multiple has been applied. For franchised business outside Chine, an in-line EBITDA and a 15x multiple have been used.

For China, Yum! has guided to MSD same-store sales at flat to 4 percent. The EPS estimates for 2015 and 2016 have been reduced from $3.21 to $3.09 and from $3.75 to $3.60, respectively.