BT2/ INCREASING EARNINGS PER SHARE TREND (one setback allowed) [perspective 2019]
Quote:
Originally Posted by
Snoopy
I have used the net profit after tax, excluding non-trading items for the purpose of this comparison. Non trading items include those associated with store closures and sales transformation costs and insurance payments. These are omitted because they obscure how the business is performing on the ground.
Net Profit/No.of Shares
2014: $18.863m /97.871m = 19.3cps
2015: $22.523m /97.871m = 23.0cps
2016: $24.207m /102.871m = 23.5cps
2017: $30.567m /122.843m = 24.9cps
2018: $40.361m /123.629m = 32.7cps
Conclusion: Pass Test
I have used the net profit after tax, excluding non-trading items for the purpose of this comparison. Non trading items include those associated with store closures and sales transformation costs and insurance payments. These are omitted because they obscure how the business is performing on the ground.
Net Profit/No.of Shares
2015: $22.523m /97.871m = 23.0cps
2016: $24.207m /102.871m = 23.5cps
2017: $30.567m /122.843m = 24.9cps
2018: $40.361m /123.629m = 32.7cps
2019: $42.181m /124.758m = 33.8cps
Conclusion: Pass Test
SNOOPY
BT3/ RETURN ON EQUITY (at least 15% for 5 years) [perspective 2019]
Quote:
Originally Posted by
Snoopy
Net Profit excl. non trading / Shareholder Equity EOFY
2014: $18.863m / $64.656m = 29.2%
2015: $22.523m / $71.210m = 31.6%
2016: $24.207m / $75.617m = 32.3%
2017: $30.567m / $192.059m = 15.9%
2018: $40.361m / $201.608m = 20.0%
Conclusion: Pass Test
PS For comparative trend purposes the annualized latest half year ROE is as follows:
HY2019: ($21.853m x2) / $217.075m = 20.1%
Net Profit excl. non trading / Shareholder Equity EOFY
2015: $22.523m / $71.210m = 31.6%
2016: $24.207m / $75.617m = 32.3%
2017: $30.567m / $192.059m = 15.9%
2018: $40.361m / $201.608m = 20.0%
2019: $42.181m / $224.670m = 18.8%
Conclusion: Pass Test
SNOOPY
BT4/ Ability to raise margins at above the rate of inflation [perspective 2019]
Quote:
Originally Posted by
Snoopy
This is the net profit, excluding non-trading items, divided by the total sales for the year. Note that in a change from the 2015 perspective I am now including 'other revenue' as part of the representative ongoing revenue of the company. This is because the largest part of other revenue is money received from YUM to act as master franchise holder for Pizza Hut in New Zealand. And this is a revenue stream that will be ongoing
2014: $18.863m / $330.399m = 5.7%
2015: $22.523m / $372.803m = 6.0%
2016: $24.207m / $404.095m = 6.0%
2017: $30.567m / $517.549m = 5.9%
2018: $40.361m / $766.289m = 5.3%
Conclusion: Fail Test
This is the net profit, excluding non-trading items, divided by the total sales for the year. I am now including 'other revenue' as part of the representative ongoing revenue of the company. This is because the largest part of other revenue is money received from YUM to act as master franchise holder for Pizza Hut in New Zealand. And this is a revenue stream that will be ongoing
2015: $22.523m / $372.803m = 6.0%
2016: $24.207m / $404.095m = 6.0%
2017: $30.567m / $517.549m = 5.9%
2018: $40.361m / $766.289m = 5.3%
2019: $42.181m / $824.915m = 5.1%
With this statistic either staying still or going backwards there is only one conclusion I can make.
Conclusion: Fail Test
SNOOPY
ROE for Overseas Venture Returns [FY2019(1) Perspective]
Quote:
Originally Posted by
Snoopy
Having posed the above question, I think rather than speculating on what the answer might be, I should 'do the maths' and find out.
From the Buffettology Workbook, p149
"We take the per share amount of earnings retained by a business for a certain period of time then compare it to any increase in per share earnings that occurred during the same period"
In this instance the 'per share earnings retained' has been supplemented by a whole lot of new capital raised with the October 2016 cash issue. So in my judgement it is best to use the change in shareholders equity from the reporting date before the cash issue (EOFY2016) to the end of FY2018. FY2018 was the first full year of operation that included the Hawaiian and most (42) of the Australian KFC acquisition (18 more KFC stores were acquired over FY2018).
|
EOFY2016 |
Change |
EOFY2018 |
Normalised Earnings {A} |
$24.207m |
|
$40.361m |
No. of Shares {B} |
102.871m |
|
123.629m |
eps {A}/{B} |
23.53c |
+9.12c {D} |
32.65c |
Owner Equity {C} |
$75.617m |
|
$210,608m |
Owner Equity per share {C}/{B} |
74c |
+96c {E} |
$1.70 |
Return on Incremental Equity / Share {D}/{E} |
|
+9.5% |
|
The above should not be too much of a surprise. If the overseas operations are now roughly the size of the NZ business, the ROE before overseas acquisitions was 30% and the ROE after overseas acquisitions was 20%, then it would take a figure that low to bring the average ROE down to 20%. I would also argue that not all of that new capital has been in use all of the time (the capital raised one quarter of the way through the study period and gradually deployed over it).
I don't know what he generally accepted value of the cost of capital of RBD is these days, But I would guess that 9.5% 'plus a bit' is still above it. I suppose what this means is that real underlying growth for RBD will be much slower going forwards compared to the recent past.
From the Buffettology Workbook, p149
"We take the per share amount of earnings retained by a business for a certain period of time then compare it to any increase in per share earnings that occurred during the same period"
In this instance the 'per share earnings retained' has been supplemented by a whole lot of new capital raised with the October 2016 cash issue. I will use the change in shareholders equity from the reporting date before the cash issue (EOFY2016) to the end of FY2019. The extra year that I have brought into this comparison since my FY2018 perspective includes the Hawaiian acquisition (as before), but also the first full year that included all (61) of the Australian KFC outlets acquired to date.
|
EOFY2016 |
Change |
EOFY2019 |
Normalised Earnings {A} |
$24.207m |
|
$42.181m |
No. of Shares {B} |
102.871m |
|
124.758m |
eps {A}/{B} |
23.53c |
+10.28c {D} |
33.81c |
Owner Equity {C} |
$75.617m |
|
$224.670m |
Owner Equity per share {C}/{B} |
74c |
+$1.06 {E} |
$1.80 |
Return on Incremental Equity / Share {D}/{E} |
|
+9.7% |
|
The above result is disappointing. RBD has suspended dividends to fund their expansion plans, raising an incremental amount of new capital to add to the cash issue capital. I would argue that the new capital raised in the cash issue in October 2016 has now had sufficient time to be deployed. Yet the return on new capital over our comparative period has barely improved from FY2018 perspective comparison.
I don't know what the generally accepted value of the cost of capital of RBD is in 2019. But I would guess that 9.7% not far away from it. There must now be doubt as to whether all the new capital being raised is even earning its cost of capital when deployed. This problem is hidden by the extremely strong cost of capital being earned in the legacy New Zealand business.
SNOOPY
Implied Interest Rate for FY2019
Quote:
Originally Posted by
Snoopy
So no concerns from me with the debt at EOFY2019 levels. Yet given the poor rate of return on RBD's overseas acquisitions so far (my post 2535) the capital position after RBD's next much mooted acquisition may or may not have to be reassessed. The size of any new subsequent acquisition will be the deciding factor.
For a company that has an appetite for borrowing, it is useful to know what borrowing rate they have negotiated. Note 6 of AR2019 shows that loans have been taken out in three jurisdictions: NZ $NZ12.200m, Australia $NZ77.921m and USA $NZ55,732m. The individual interest rates in each jurisdiction are not detailed. Yet based on starting and finishing total balances for the year, and knowing the overall finance bill, we can calculate an indicative figure:
$6.797m / [1/2( $145.853m + $166.815m )] = 4.3%
RBD has taken out several interest rate swaps, the details of which we shareholders can find under Note 6 in AR2019. Generally an interest rate swap is taken out to provide certainty in a payment stream going out into the future. However, taking out an interest rate swap also implies the loan rate is somewhat favourable. If it was not so, then the company might just eschew the derivative and rely on the spot interest rate payable at any time.
Using indicative exchange rates of $NZD1 = $USD0.67 and $NZD1 = $AUD0.95, the total interest rates swaps in NZD terms add up to:
($5.0m+$10m) + ($15m+$20m)/0.95 + ($10m+$10m)/0.67 = $15m + $36.8m + $29.8m = $81.6m
This is well shy of the actual total loan amount of $145.853m. One way to interpret this is that management expect borrowing interest rates to fall going forwards. Most of these hedges were taken out in November 2017, just prior to substantial acquisitions in Australia and the USA. At that time the NZ contract rate of 4%, the Australian contract swap rates of 3.4% and 3.2% and the US contract swap rate of 3.8% obviously looked good.
SNOOPY