In the fast food industry accounts are normally paid 'on time' and 'in cash'. Furthermore stock turnover is rapid. This enables a fast food business to carry more debt than other retail businesses as cashflow is better. But how much debt is too much debt? Now that RBD has become a 'growth company' and dividends have been suspended, this is a question we shareholders should consider.
My favourite debt measure remains 'MDRT'. Put simply, MDRT is the answer to the question: "If all earnings after tax were poured back into repaying the company's bank debt, how long would that take?" When working out this, we must use a company's declared IFRS profit, not a normalised profit. It takes actual cash to repay a bill!
|
FY2015 |
FY2016 |
FY2017 |
FY2018 |
FY2019(1) |
FY2019(2) |
Bank Term Debt |
$12.675m |
$22.550m |
$46.482m |
$166.815m |
$145.853m |
$154.326m |
less Cash and Cash Equivalents |
($1.575m) |
($1.093m) |
($70.390m) |
($10.410m) |
($15.034m) |
($34.965m) |
equals Net Debt {A} |
$11.100m |
$21.457m |
NM |
$156.405m |
$130.819m |
$119.361m |
Declared NPAT {B} |
$23.830m |
$24.070m |
$25.595m |
$35.466m |
$35.741m |
$36.650m (a) |
MDRT {A}/{B} |
0.5 yrs |
0.9 yrs |
0 years |
4.4 yrs |
3.7 yrs |
3.3 yrs |
(a) $30.542m X (12/10) = $36.650m (Declared profit of $30.542m is for a ten month period)
The anomaly in the table was the large amount of cash carried on the balance sheet at EOFY2017. That cash was raised for the Hawaiian settlement that was still pending at balance date. $94 of this cash was raised through the share offer dated 26th October 2016 via a 1: 5.15 cash issue. If we remove that cash from the balance sheet we can get a more representative MDRT figure:
$70.092m / $25.595m = 2.7 yrs
2017 was also the year that RBD announced their change of direction to become a 'global' rather than a 'solely New Zealand based operator' of restaurants. Underlying EPS has risen from 24.9cps to 36.6cps from EOFY2016 to EOFY2019(2) over the almost four years since. But net debt has ballooned as well.
My rule of thumb for the MDRT answer in years is:
years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern
So no concerns from me with the debt at EOFY2019(2) levels. But RBD has announced a subsequent acquisition.
http://nzx-prod-s7fsd7f98s.s3-websit...496/314595.pdf
"The transaction (to purchase 70 Californian restaurants) is for a purchase price of $US73 million plus capital expenditure reimbursements for recent store refurbishment and customary working capital adjustments. It will be fully debt funded."
I think that translates to about $NZ100m of new debt. Profits at EBITDA level are listed as $US12m+ ($NZ19m+). That is a similar level of historical profitability as RBD's "KFC Australia" investment. Yet given the much reduced profits from Covid-19 flow on effects over FY2020, we may yet see RBD net profits down for the year by 20%. And that means a projected MDRT figure for FY2020 of something like this:
$219.361m / (0.8 x $36.650m) = 7.5
I would call that a worry. But major shareholder 'Finaccess' might say it is 'efficiently maxing out debt covenants'. I will leave you, the investor, to choose the interpretation that you are most comfortable with!