Credit Suisse Upgrades Yum! Brands (YUM) to Neutral; China Spin-Off Pressure to Increase
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Credit Suisse upgraded Yum! Brands (NYSE: YUM) from Underperform to Neutral with a price target of $75.00 (from $86.00) as expectations have been reset and the pressure to spin-off China will increase.
Analyst J West commented, "The tone of YUM's conf. call, as well as our conversations with investors, suggests the pressure to spin off China (or take other strategic action) will only increase following the dramatic 3Q miss. We now put a higher probability on this scenario. While we see limited valuation arbitrage from a spin, we believe investors would prefer the option of owning the YUM of their choosing: either 1) a high-return and high cash flow, but slower growth, franchise biz or 2) a higher risk-reward China growth story."
The analyst added, "We also see significant value creation (~$14x/share) if the non-China franchise business were also levered to 5x EBITDA and proceeds used to repo stock. This separation + leverage opportunity points to ~$84/share in total value, as a base case. Aside from this potential upside scenario, YUM's stock is also now cheaper in light of the ~19% correction on Wed. relative to our 6% reduction in 2016 EPS. YUM now trades at ~19x our new 2016E EPS of $3.57 and ~10.5x EV/EBITDA."
Shares of Yum! Brands closed at $67.71 yesterday.
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