IML’s top small cap for 2025

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In this special podcast IML small-mid cap portfolio managers Marc Whittaker and Lucas Goode reveal their top small cap pick for 2025. This stock is up around 40% so far this year, but Marc and Lucas think it ticks all the boxes for quality and value and is also looking good for 2026.

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Lightly edited transcript – Recorded on 3 December 2025

Carl McMinn: Hello and welcome to “Navigating the Noise”, a podcast by Natixis Investment Managers, where we bring you insights from our global collective of experts to help you make better investment decisions. I’m Carl McMinn, and today I am joined by Marc Whittaker and Lucas Goode, portfolio managers for the IML small and mid-cap strategies, to discuss their stock of the year, Collins Food Group, ASX ticker CKF.

Marc and Lucas, double trouble. Great to have you here, welcome back to the podcast.

Marc Whittaker: Thanks for having us.

Lucas Goode: G’day, Carl. Always good to be here with you.

Carl: Well, it’s always nice to have you. Did someone say KFC? Collins Food Group as it’s much better known as the biggest operator of KFC restaurants in Australia. To start us off with, can you take us through your investment thesis for Collins Foods and how long have you held it?

Lucas: Yeah, Marc, just why is Collins Food so finger-lickin’ good?

Marc: Oh my goodness, the advertising clearly works as far as KFC is concerned. No, thank you. Look, we’ve owned CKF for quite some time. It’s been a reasonable holding in the Future Leaders Fund, and it’s been a more recent addition to the Smaller Companies Fund, particularly since Lucas and I took over that fund back in June.

As you highlighted at the beginning Carl, Collins is the largest owner and operator of KFC restaurants in the country. Essentially, one in every three KFCs in Australia is owned and operated by Collins Foods.

Now, interestingly enough, of the 290 stores they have in the country, 184 of them are found in Queensland. They are basically a Queensland and Western Australia-based franchisee operator of KFC. So, why do we like them? Well, when you think about retail stocks in general—and KFC essentially is a retail stock—what are the things you’re looking for – what’s a good story?

If you look at KFC, they have a same-store sales or like-for-like sales growth line that is growing quite nicely. They reported like-for-like sales of upwards of three and a half percent in their most recent trading period for the fiscal year.

You also want a rollout strategy or some sort of growth strategy. What we see with Collins is that they do have a growth strategy. They have the ability to roll out new stores within Australia, where yes, they’re fairly dominant, but they’re still willing to expand. They’ve also got opportunities to roll out stores in Europe; the Netherlands and, in particular, Germany are two territories where they have franchisee rights to the KFC brand.

Lastly, you want a retailer where the opportunity to expand operating margins is there. What we’re seeing with the Collins management team is the initiatives they’re putting in place to improve efficiencies in the kitchen and in front office of their KFC stores—whether that’s digital kiosks or whether it’s getting more people more quickly through the stores — they are enhancing their operational efficiencies. We’re also seeing margin expansion across both geographies where they operate, in Australia and Europe. So, a couple of really good reasons to like it right there. The valuation for us is quite attractive as well. For us, it represents a resilient business with the ability to grow and a very capable management team in place. It’s recurring as well, it’s nice and resilient – KFC, fried chicken, isn’t going away anytime soon.

Lucas: Is it recurring in the Whittaker household? Is it a weekly visit?

Marc: Highly recurring Lucas, given the tribe of children in our home.

Lucas: You mentioned the like-for-like sales growth; I think you said three and a half percent in the last period. How does that compare with other quick service restaurants, as us in the financial industry refer to fast food joints?

Marc: Yes, KFC is actually outperforming the sector at the moment in terms of the Australian market. The quick service restaurant (QSR) sector has been a bit tough lately due to cost-of-living pressures and the rising costs of doing business. So, same-store sales is all important. If you want to grow margins and profits, you need to grow your top line above the rate of cost inflation. Essentially, you need revenue growth of about three percent or higher just to stand still. KFC’s performing well in that regard; the competitors not so much.

One of the key reasons for this is that KFC is a value offer. Yes, the brand is powerful, we know it resonates with consumers; we all know the brand and the jingles from their advertising. It’s also a great value offer for consumers. For example, if I take my 17-year-old son to McDonald’s and he asks for a Big Mac meal, it’s going to cost me $18. I’m stunned!

Lucas: The Big Mac’s not even that big!

Carl: It’s not even that good.

Marc: If I go to KFC, I can feed the family—keeping in mind I have six children and two very hungry adults—14 pieces of chicken and plenty of sides for not much more than $30. When you compare that with other offerings, it’s just really compelling value, and that’s what’s kept people coming back to KFC

Lucas: I know that another ASX-listed QSR operator, Domino’s, has had real trouble with aggregators. From Domino’s perspective, it’s not surprising, right? I can get pizza delivered at the click of my phone from any number of local restaurants that taste a lot better than Domino’s. Do you think this is a risk for KFC going forward?

Marc: The aggregators have been around for a while, and in fact, they’ve actually helped KFC, since KFC doesn’t have its own delivery service. Domino’s has been delivering pizza for quite some time with their own fleet.

Lucas: So it’s actually grown the market for KFC and they’re still a lot cheaper…

Marc: That’s right. If you look at KFC’s growth rates in Australia over the last ten years or so, aggregators have added about one percent to their top-line growth in system sales over that period. So, those services like Uber Eats and DoorDash have, in fact, been quite helpful for them.

Lucas: Did you say there are 180 something KFCs in Queensland?

Marc: Yes, there are 184 KFC stores in Queensland.

Lucas: How much fried chicken do you think Queenslanders eat, Carl?

Carl: Plenty! When they launched that Kebab meal, I couldn’t stop; I was there five times a week minimum I reckon.

Marc: Every KFC store in Queensland is owned by Collins, so they own 100% of the stores there. They own about 80 to 90% of the stores in Western Australia and 100% of the stores in Tasmania. It’s not a big market for them, but they have a number of stores there.

Lucas: The positive like-for-like growth indicates they’re not completely saturated in Queensland, but given how many stores they’ve got there, I think you were telling me earlier, Marc, that it’s actually the most penetrated market in the world. The number of stores per capita is higher in Queensland than in any other region globally.

Marc: And the consumption per capita, too.

Lucas: I’m not sure what that says about the health of Queenslanders.

Marc: You wouldn’t want the Broncos and the Lions winning every season, Carl, because otherwise, that might be catastrophic for the health of the population.

Lucas: It does imply that eventually, you’re going to hit a ceiling in terms of the number of stores they can support in the Australian market. So, where does the next growth options come from for Collins?

Marc: Management have set targets to roll out about a hundred stores over the next five years, with about half of those in Australia.

The other half will be in Germany, with perhaps some in the Netherlands, but mainly Germany. Think about population growth: Western Australia and Queensland are the two fastest-growing states in the country. If you want to be exposed to any states right now, WA and feel like a couple of pretty good names to be exposed to. There’s natural population growth which means you have to roll out additional stores anyway. Also, New South Wales and Victoria have only a handful of stores. Whether they’re buying existing stores or rolling out new locations in virgin territories remains to be seen, but they certainly have room to expand the network.

We haven’t touched on Germany much, but that’s a genuine growth pillar for them. While Queensland may be the most penetrated market, Germany is one of the most underpenetrated markets globally.

Lucas: It’s quite surprising, considering Germans enjoy heavy or fried food. I would have thought there’d be a lot of KFC there.

Marc: Maybe they prefer pork knuckle or something like that.

Lucas: Don’t rule it out!

Marc: We do have the new Bahn Mi, a Vietnamese roll offer, that has just launched in Australia, so who knows? Germany might prefer a pork knuckle or two as well.

Lucas: So, how big do you think the upside could be in Germany? Most of the business is in Queensland at the moment, but Germany has a population that’s an order of magnitude larger, so it must be a big opportunity for them to roll out stores there.

Marc: The brand resonates really well in Germany, but it just hasn’t been very successful in rolling out physical locations.

Lucas: Yeah, I believe Yum <owner of KFC brand> actually stripped the master franchisee of their rights there.

Marc: That’s right. Collins has recently been granted additional rights in two key territories in Germany, so there’s a real opportunity for them. However, not everything is rainbows and chocolates with KFC. They’ve had some issues in the Netherlands, for example, where they’ve been the sole franchisee, and the KFC story there hasn’t been great. They’ve taken some learnings from that market. Obviously Germany does present a significant opportunity; it’s a far larger market than the Netherlands, with a population of about 80 to 90 million people compared to the Netherlands’ 16 to 17 million, but they’ve got to make it work. It’s not a slam dunk by any means.

We know the brand resonates well, there is demand for KFC in Germany. When you compare it to other American QSR brands like McDonald’s and other burger chains, it’s stark how large the gap is between KFC and those other brands.

There’s certainly an opportunity there but you need to execute. Execution to date has been a little bit up and down, but you’ve got Xavier there as the new CEO. He’s been there for a year now. One of the good things he’s done is to reign back on the Taco Bell experiment in Australia, which wasn’t really working. So Taco Bell, if people aren’t familiar with it, is a QSR Mexican food chain. Again, a brand that wasn’t really that well known by locals over here. It wasn’t working, so he decided to pull the plug on that, which I think is a good thing. Get back to what you do well, which is KFC
Lucas: I was going to ask you about Xavier and the new management team, Marc. As we’ve spoken about a lot, investing in small caps is really about investing in people.

Marc: That’s right.

Lucas: It’s fair to say the previous management maybe didn’t do the greatest job of executing in Europe, specifically the Netherlands, where they opened a lot of stores that seemed relatively marginal. So, what’s your level of confidence in the new team executing in Germany, that does seem like where there’s the most upside in terms of rollout potential long term?

Marc: Yes, absolutely. To be really excited about Collins, you need to have some degree of enthusiasm, or a positive view at least, on the German opportunity. I think Xavier is very measured; he’s not going to rush to do things. The Taco Bell situation really highlights the fact that he is going to look at everything in a clinical fashion. Does it make sense? What’s the return on investment? What’s the long-term outlook?

His commentary on Germany to date suggests that this is a market that makes sense. We are underpenetrated, there’s a great pathway in front of us for rolling out new stores. Germans don’t mind KFC; they like fried food, they’ll eat fried chicken you just need to get it in front of them. So if they’re walking down the street and they can find a store to walk into, they most likely will.

Xavier has started well, he has been here for 12 months now, so I think he’s made some good decisions and obviously the Australian business has been performing well with the margin expansion, the way he’s thinking about in-store experiences for customers, but also the things they’re trying to do behind the counter in the back of kitchen. Those turnaround times, that efficiency. People go to a store, they get served quickly, they get their food, they have a good experience, they come back. That’s the key.

And I think those learnings and the ability to market and the support of Yum! Brands as the ultimate brand owner, I think, you know, there’s plenty of things moving in their favour potentially to, to make Germany successful.

Lucas: You touched upon KFC’s value and I think Carl in his intro referenced how good the marketing and advertising has been over a long period with KFC. It’s a very strong brand. I think from my perspective, the other thing that you haven’t actually mentioned that gets people coming back or even, you know, reacquiring old customers, is the amount of menu innovation. There’s always something new that they seem to be advertising. I mean, I don’t know what the most popular menu item is in the Whittaker household.

Marc: Cheap as chips! $24 for ten pieces of chicken, along with quite a few sides— we know it inside out, that meal deal on a Friday after school.

Carl: Makes sense for a value manager!

Marc: It really does. It’s tough to find that level of value anywhere else, and that’s an example of innovation, certainly at the pricing level. Innovation in product and pricing and so forth has always been a highlight of Collins and the Yum Company. Expect to see more of that. You’ve got to entice people to come into the store with value offers and the perception you’re getting a good deal at a good price, and just overall experience. The digital experience as well; when I go into a store, I can order through the kiosk or at the front counter – it’s all digital, it’s seamless – they’ve got their app which is very good and the aggregators are helping too.

It’s a good story. Management are good, it meets all the metrics we look for as a value and quality focused manager at IML: recurring earnings, a capable management team, a genuine competitive advantage from the power of the brand, and an opportunity for growth. And it’s trading at a good price; about 16 times earnings into 2027 (price to earnings), which I think is quite attractive.

Lucas: Collin’s reported its half-year result yesterday, Marc. How did you view the result? Were you surprised the shares sold off?

Marc: The shares are a little bit soft but remember the stock’s up 60% year-to-date. So it’s been a very good performer. And the result yesterday was bang in line, so no surprises. I guess the market was probably hoping for a bit more of a positive surprise, but I would argue, and quite strongly, that the outlook commentary by management was a touch conservative. You don’t want to over promise or put all your eggs into the first half basket, when you’re reporting as a management team.

I think there’s lots left in the KFC bucket in terms of the second half and the consumer’s in a good place at the moment. Rate cuts may be on hold, maybe we don’t get that, but consumers are spending, they’re feeling a little bit more confident and typically you see QSR respond in that environment. So I think, I think we’ll see those like for likes continue to grow, Germany and the Netherlands is a bit more of an open question, that’s a little bit slower, but over time I think that should be a good opportunity for them as well.

Carl: Thanks Marc and Lucas. I think it’s easy to say I’ll take a Zinger over a Big Mac any day. Great to hear from you both and why you think Collins Food Group is the stock of the year. Please tune in again soon to hear more from Marc and Lucas and the team at IML as well as others in our global collective of experts. Thanks very much.

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