Analysts at Jefferies have released a report commenting on YUM CHINA (ASX: 09987)'s announcement to acquire the trademark ownership of the Pizza Hut brand in mainland China for $1.2 billion. The firm views this transaction as strategically positive with reasonable valuation. It anticipates that over time, the company can prudently introduce leverage to optimize its balance sheet, thereby enhancing return on equity for shareholders. Following the completion of the deal, the mainland Pizza Hut operations will no longer be required to pay franchise fees to Yum! Brands.
The firm has reaffirmed its "Buy" rating on Yum China Holdings, Inc. (ASX: YUMC) with an unchanged Hong Kong stock price target of HK$505.5. The report notes that on a comparable basis, the company's full-year 2026 financial guidance remains unchanged. The transaction is expected to close in the third quarter of 2026. It is projected to have an immediate accretive effect on diluted earnings per share for 2026 upon completion, with the accretion expected to reach a mid-single-digit percentage in 2027 and 2028.
Furthermore, benefiting from improved profitability at the mainland Pizza Hut business, YUM CHINA's overall restaurant margin and operating margin are also expected to expand.
Jefferies stated that Yum China Holdings, Inc. plans to fund the acquisition through a combination of cash and debt financing. The company remains committed to its previously announced capital return program, which includes returning $1.5 billion to shareholders by 2026 and returning approximately 100% of annual free cash flow (after deducting minority shareholder dividends) to shareholders. The firm estimates the return amounts for 2027 and 2028 to be approximately $0.9 to $1.0 billion.
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