RBD - Restaurant Brands

[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.

Re-reading the Finaccess takeover offer the position on future growth has been mapped out, From page 8:

"Global Valar has confirmed to the independent directors that it does not currently intend to promote a change to Restaurant Brands dividend policy in the near term."

- That is the bit that made me think dividends would continue.- But continuing on reading:

"Global Valar has also stated that after completion of the offer the dividend policy will need to continue to be assessed against other capital requirements in the business on an ongoing basis, with Shareholder value from a dividend needing to be considered relative to the potential value creation from reinvesting the funds within the business."

The takeover document then goes on to talk about capital structure

"Global Valar has advised the Independent Directors that it does not intend to significantly lever Restaurant Brands (i.e. increase Restaurant Brands debt)"

and we learn

"Global Valor does not envisage any future equity capital being required from Restaurant Brands shareholders in the near to medium term, although any large-scale initiatives which are unable to be funded from from business cashflow would require an assessment of capital sources at the relevant time."

We then learn about another Global Valar subsidiary 'AmRest', another owner of restaurants:

"Finaccess Capital set a maximum target leverage ratio of 'Net Debt'/ EBITDA of 3.2x."

So what does all this tell us about 'Restaurant Brands' and the capital required for any acquisitions made from here? If we assume that a "Net Debt/EBITA" ratio of 3.2x applies here, we can start by looking at how this ratio stacks up now. I calculate EBITDA by taking EBIT before non-trading items and adding back 'Depreciation and Amortization'.

	FY2018	FY2019
Bank Term Debt	$166.815m	$145.853m
less Cash and Cash Equivalents	($10.410m)	($15.034m)
equals Net Debt {A}	$156.405m	$130.819m
Declared EBIT	$63.182m	$65.229m
add Depreciation & Amortisation	$29.599m	$30.567m
equals EBITDA {B}	$92.781m	$95.796m
Net Debt/EBITDA {B}	1.69	1.37

:
We are well under that target figure of 3.2 for the Net/Debt EBITDA ratio. In fact from EOFY2019, the net debt can increase to:

$130.819 x (3.2 /1.37) = $305.563m with no more earnings before this self imposed covenant is breached.

If RBD persist with getting that mainland USA beachhead, then my guess is that a even a $US50m -$US100m purchase price for a turnaround business in mainland USA of marginal profitability will not worry the new board. They will be happy with such a post acquisition debt expanded balance sheet.

SNOOPY

[winner69]

Russel always did say RBD would be a 10 buck share

He's a guru that Russel - quite a few didn't believe him


Cool

[Snoopy]

Russel always did say RBD would be a 10 buck share

He's a guru that Russel - quite a few didn't believe him

Even Russel didn't believe it, because he agreed to 'on sell' most of his shares to 'Finaccess' at $9.45. Is Russel doing the right thing retaining the RBD shares he has left? One way is answer this question is to compare RBD with another company developing KFC and Pizza Hutt Restaurants around the Pacific rim, this time in the worlds most populated country: 'The People's Republic of China'. Some of you may have noticed that I have started a 'Yum China' (YUMC thread) on the Overseas Forum. i have pulled much of the YUMC comparative information below from that:

	Restaurant Brands	YUM China
Share Price 19-08-2019	$10.20	$44.11
Normalised eps (last year)	33.8c	$1.62
Historical PE (last year)	30	27
Forecast eps (this year)	36c (+6.5%)	$1.72 (+7.5%)
Forecast PE (this year)	28	26
Forecast dps (this year)	0c	48c
Forecast Dividend Yield (this year)	0%	1.1%
FIF Liability (this year)	0c	(67c)
ROE (last year)	18.8%	21.3%
Incremental ROE (since 2016 capital raising)	9.7%	15%
MDRT (last year)	3.7 years	0 years
Net Profit Margin (last year)	5.1%	8.2%
Brand Intellectual Property Owned	None	'COFFii & JOY' (Starbucks challenger) and 'Little Sheep' (Hot Pot meals)

This table shows that RBD compares unfavourably on all measures, bar the FIF regime bill that applies to YUMC for those NZ investors subject to the FIF regime. For RBD: Lower dividend (actually none), higher PE ratio, lower forecast growth, lower returns from reinvested new capital, lower net profit margin and higher debt.

The forecasts for RBD are perhaps a little more uncertain, because it is only in the last couple of years that they have become 'overseas focussed'. It is therefore more uncertain just how successful they will be in the medium term with this new strategy. My 'Buffett Growth Model' is predicting a total return (including capital gain dividends and taxes) for YUMC of just under 7.4% per annum going forwards. RBD can't be evaluated using the 'Buffett Growth Model'. But, given the unfavourable comparative figures, we can reasonably look forward to a total return for RBD of somewhat less that 7.4% per annum going forwards.

Is RBD a good investment today? I have confidence in the direction of the company, and it seems to be executing their overseas expansion strategy in a satisfactory way. Nevertheless I am of the opinion that a forecast PE price of 28 is too high a price to pay. At today's prices I would favour YUMC as the better investment. But better is a 'relative term'. Personally I would be looking for a good dip in the market, before I would be willing to put more capital into either.

SNOOPY

[janner]

Even Russel didn't believe it, because he agreed to 'on sell' most of his shares to 'Finaccess' at $9.45. Is Russel doing the right thing retaining the RBD shares he has left? One way is answer this question is to compare RBD with another company developing KFC and Pizza Hurr Restaurants around the Pacific rim, this time in the worlds most populated country: 'The People's Republic of China'. Some of you may have noticed that I have started a 'Yum China' (YUMC thread) on the Overseas Forum. i have pulled much of the YUMC comparative information from that:

	Restaurant Brands	YUM China
Share Price 19-08-2019	$10.20	$44.11
Normalised eps (last year)	33.8c	$1.62
Historical PE (last year)	30	27
Forecast eps (this year)	36c	$1.72
Forecast PE (this year)	28	26
Forecast dps (this year)	0c	48c
Forecast Dividend Yield (this year)	0%	1.1%

I see .. Said the blind man..

Where is my writing stick ??..

Good post Snoopy.

[artemis]

Looks like the first Taco Bell to open soon in New Lynn. Based on job advert for an assistant manager.

[Snoopy]

KFC in the US are test marketing plant based chicken products, in partnership with one the years hottest floats 'Beyond Meat'.

https://finance.yahoo.com/news/kfc-i...120016030.html

This is a follow up project to the new meatless meatballs that are now be trialled at 'Subway'.

None of this has hit NZ yet of course. But since these new products are expected to attract a premium price, could this go some way to justifying the relative high value of takeaway restaurant companies not only in NZ, but worldwide?

I can see more potential for value at RBD too. When Russel finally decides to 'hang up his chicken wings' what about going for a plant based replacement? A triffid like being could easily be grown which incorporates the general style and appearance of Russel. It should be a much cheaper process than hiring a new CEO!

SNOOPY

[Blendy]

Breaking News, friends - there's a new ridiculous KFC burger on the horizon - with donuts for buns. https://mashable.com/article/kfc-don...ontent=culture

People on Twitter do not care for my "completely wrong" opinion that this would taste terrible and it appears that there's a decent market for this if it were to launch here.

[peat]

fried chicken, burgers and tacos - all doing good
not so much the pizza

[winner69]

Jeez Shareprice will be 12 bucks soon

Wasn’t long ago it reached 10 bucks .....amazing eh

[Snoopy]

fried chicken, burgers and tacos - all doing good
not so much the pizza

All comparisons are with the equivalent quarter of the previous year

	Restaurant Brands NZ	YUM China
Overall Sales Increase	+3.5%	+6.7%
Increase in Store Numbers	-6.6%	+6.7%
KFC Same Store Sales Increase	+6.1%	+5%
Pizza Hutt Same Store Sales Increase	-4.3%	+1%
Percentage of Delivery Sales (Carls)	8.9%
Percentage of Delivery Sales (KFC)		18%
Percentage of Delivery Sales (Pizza Hutt)		25%
Share Price Increase 01-03-2019 to 30-08-2019	+16%	+9.7%

RBD has done well, with the only two negative figures: the loss of stores over the year largely due to the sale of 'Starbucks' and the stalling Pizza Hutt same store sales. The annual RBD sales increase was only half that of YUMC. Meanwhile the share price appreciation for RBD over the last six months was twice that of YUMC. I don't think this makes sense. Relative to YUMC, RBD was overvalued a month ago and is even more overvalued now. I wonder if more deliveries for NZ customers via the likes of 'Uber Eats', will see that extra step growth that will be needed to justify the RBD share price above $11?

SNOOPY