Collins Foods stock rating upgraded by RBC Capital on strong sales

RBC Capital upgraded Collins Foods Ltd. (ASX:CKF) to Outperform from Sector Perform, raising its price target to AUD11.70 from AUD8.50. This upgrade follows Collins Foods' robust 6.7% sales growth in the first 18 weeks, exceeding RBC's estimates, and operational improvements across its Australian and German businesses. RBC expressed optimism regarding the company's earnings growth potential, citing top-line growth, gross margin improvements, and an attractive valuation despite improved prospects.

Analysis

RBC Capital has upgraded Collins Foods Ltd. (ASX:CKF) to Outperform from Sector Perform, raising its price target by over 37% to AUD11.70 from AUD8.50. The revision is directly linked to a robust trading update for the first 18 weeks, which revealed 6.7% sales growth, surpassing RBC's own 5.54% estimate. This top-line strength is attributed to successful promotions and menu innovation within its Australian operations. Furthermore, RBC notes that the German business is refining its marketing strategy subsequent to Yum!'s reacquisition of master franchise rights in December 2024. Despite Collins Foods maintaining its existing FY26 Net Profit After Tax (NPAT) growth guidance, RBC expresses greater optimism, citing the potential for accelerated earnings growth fueled by continued sales momentum and gross margin improvements. Crucially, the investment firm highlights that CKF's valuation is currently in line with its 5-year average P/E ratio, suggesting the market has not yet priced in these improved earnings prospects.

Key Decisions for Investors

• Investors should consider the RBC upgrade and the AUD11.70 price target as a strong bullish signal, underpinned by tangible evidence of above-forecast sales growth and operational execution.
• The stock's current valuation, trading in line with its 5-year average P/E, may present a compelling entry point if an investor shares RBC's view that the market has not yet factored in the company's enhanced earnings growth potential.
• It is prudent to monitor the execution and impact of the new marketing strategy in the German segment and track gross margin trends to validate the thesis of sustained earnings acceleration.