May 15 (Reuters) - The likelihood is growing that Yum Brands Inc will spin off its China business, J.P. Morgan said in a client note, upgrading the company’s shares to “overweight” from “neutral”.
Yum, owner of the KFC and Pizza Hut brands, gets about a third of its operating income and half of its revenue from China, where it is the biggest Western fast-food chain.
J.P. Morgan analyst John Ivankoe, who attended a Yum investor conference in China this week, said in a note published on Friday that he came away with a sense that a spinoff of Yum China was now more a “probability” than a “possibility.”
Ivankoe raised his price target to $108 from $83.
Yum’s shares were up 3 percent at $93.07 at midday, having gained about 24 percent since the start of the year.
Hedge fund Corvex Management, which has been urging Yum to spin off its China operations, has said the business could be worth more than Yum’s share price suggests.
Corvex, which owns about 3 percent of Yum, has said its shares could rise to $130 following a spinoff.
Activist investor Daniel Loeb’s Third Point Capital has also built a significant stake in Yum, but Loeb has said that while he is not against a spinoff, he isn’t pushing for one right now.
Ivankoe said it appears the “hard walls” keeping Yum as one company were coming down.
“In terms of the activist case, we feel the most likely scenario is that Yum does a tax-free spinoff of its China business, pursuing a joint U.S. and Hong Kong listing,” he wrote.
Yum said in April that its business in China was recovering after allegations last year of improper meat handling by one of its suppliers and it expected the year to end strong. (Reporting by Nayan Das in Bengaluru)