Yum Brands Has 30% Upside Following China Divestiture

Credit Suisse’s Jason West has upgraded Yum! Brands, Inc. YUM to Outperform from Neutral to reflect the strong growth prospects for "New Yum" (non-China).

West’s bullish outlook is centered on "New Yum" (non-China), which will begin trading on a standalone basis on November 1, and sees potential for 30–35 percent total return in New Yum shares over the next two years.

Justification

The analyst believes upside to New Yum should come from solid EPS growth, accelerating new store growth, excess capital, modest multiple expansion and the 2-plus percent dividend yield.

“We see a base case stock price for New Yum in the ~$80+ range by mid/late 2018 (up from ~$62 in the "when-issued" market today). This implies a forward valuation of -16x our 2019E EBITDA for New Yum, consistent with other global franchised cos with similar store mix and growth (e.g., Domino's Pizza, Inc. DPZ, Dunkin Brands Group Inc DNKN, Papa John's Int'l, Inc. PZZA, Restaurant Brands International Inc QSR),” West wrote in a note.

Related Link: Yum Brands' Better Business Model

Further, the analyst sees relatively low risk to his New Yum growth model “given a balanced portfolio across brands/geographies and relatively low sensitivity to same store sales and cost inputs.”

Looking Ahead

West also anticipates New Yum to return more than $7 billion in cash to shareholders, or about 30 percent of market cap, over 2017–19. The analyst projects about 80 percent of those returns would be via buybacks.

The analyst also increased his consolidated price target to $96 from $90, with about $68 for New Yum and about $28 for Yum China.

“We recognize that investors buying YUM stock today are still getting the China business, though we believe this business has been de-risked at the current implied multiple (-7x '17E EBITDA),” West added.

Shares of Yum Brands closed Tuesday’s trading at $86.16.

Full ratings data available on Benzinga Pro.