Yum Split Boosts Our Appetite for the Firm's Undervalued Shares
We have a favorable view of the firm’s plan to spin off its China division and think both business will benefit from significant competitive advantages, says Morningstar’s R.J. Hottovy.
Confirming speculation following Keith Meister's recent board appointment,
As we've previously stated, we have a favorable view of the separation, as Yum China is a mostly company-owned ecosystem with a self-contained supply chain, distribution, site selection, and advertising infrastructure versus the largely franchised business model in other parts of the world. We believe a separation will create minimal operating disruptions without sacrificing meaningful scale--keeping our wide moat rating intact--while allowing the company to take advantage of a more conducive franchising environment in China. Additionally, we believe a separation will allow investors to better tailor their level of exposure to China and Yum's other emerging markets. We will wait for details regarding leverage and China franchise unit growth plans before finalizing changes to our longer-term cash flow and cost of capital assumptions, but we view the shares as undervalued relative to our $92 fair value estimate (which assumes a stand-alone valuation of $42 for Yum China).
Morningstar Premium Members gain exclusive access to our full Yum Report, including fair value estimates, consider buying/selling prices, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.