RBD - Restaurant Brands

[Snoopy]

Table completed, we can carry on using historical comparative ratios, provided we use EBIT and EBITDA figures calculated under the 'old standard'. Let's begin!

The following valuation is based on historical earnings as listed in the FY2020 annual accounts that covered the twelve month period, included Covid-19 lock-downs, ended 31-12-2020. Generally you would try to value a company on forecast earnings. However, due to Covid-19, no future guidance has been issued by the RBD board RBD received a wage subsidy for restaurants closed during periods of Covid-19 lock down in New Zealand. In Hawaii they received a Covid-19 loan which may be forgiven. If this loan is forgiven it will be listed as extra income for the FY2021 year. No other governmental assistance was received.

It is common to value a company based on 'enterprise value'. This reflects the fact that anyone acquiring a company for the purposes of control will have to pay the market value for the shares (a positive asset) and take on the book value of the balance sheet value of the net debt (a negative asset).

Enterprise Value = Market Capitalisation +Total Debt − Cash

In this instance the 'Enterprise Value market factor' is determined by historical earnings multiples that the market has determined it would be willing to pay for similar companies. This information can be found in the 'Target Company Statement' as commissioned by 'Restaurant Brands' in response the 'Finaccess' offer to buy a controlling stake in RBD in early 2019.

	Historical EBITDA	Historical EBIT	Reference
As Calculated {A}	$106.785m	$69.958m	My post 2650
Market Multiple {B}	10.9	18	RBD Commissioned Independent Advisors Report p32
Net Bank Debt @ 31-12-2020: (Total Bank Debt - Cash) {C}	$200.732m	$200.732m	AC2020 'Balance Sheet'
Enterprise Value @ 31-12-2020: {A} x {B} - {C}	$963.225m	$1058.512m
No. of Shares on Issue@ 31-12-2020	124.759m	$124.759m
Enterprise Value 'per share'	$7.72	$8.48

The share price closed at $12.45 on 10-03-2021 You could argue that since Covid-19 there has been a 'flight to safety' and those companies supplying staples (like food) have been re-rated. You could also argue that lower market interest rates have themselves pushed share valuations higher. However the premium that the market is pricing into these shares does seem very significant (between 47% and 61%). Good as this company is, it looks to me to be too highly priced to reflect any type of historical norm fair value. The new Californian arm is operating ahead of projections but has come with large new borrowings that has depressed RBD's enterprise value. Consequently I would continue to suggest new investors avoid putting money into RBD at these prices.

SNOOPY

discl: who nevertheless intends holding onto my own residual 'post controlling takeover' shareholding!

[Snoopy]

'
Restaurant Brands' (RBD) are now 75% owned by 'Finaccess Capital' (stake acquired in April 2019) headquartered in Mexico. 'Finaccess Capital' was created from money received by the Fernandez family (Carlos Fernandez is now on the RBD board) from the buyout of Mexico's 'Grupo Modulo', a beer market giant that was gobbled up by an even bigger beer fish 'Anheuser Busch', the world's biggest brewing company. 'Finaccess Capital' has a strong presence in the casual dining and quick service restaurant sector. It currently holds a 67% stake in 'Amrest Holdings BV', a similarly (from YUM Brands) franchised fast food company in Europe that is listed on the Polish Stock Exchange. Nevertheless, the intention is to maintain operational separation between 'Restaurant Brands' and 'Amrest'.

RBD have appointed a new director on the board who is based in Europe!

https://www.nzx.com/announcements/367392

That will make 'zoom' board meetings interesting as Mexico , New Zealand and Spain are in very different time zones. It might be a 'zzzzzzzzzzoom' meeting for some. I was also very disappointed to see the AGM will again be a virtual meeting this year,

Notwithstanding all the above, Maria Elena (Malena) Pato-Castel does look like a good appointment. I have copied her bibliographical details from the Amrest website, in expectation they will be removed from there because she has retired

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Malena Pato-Castel
Owned Brands President

Mrs Malena Pato-Castel graduated in Business Administration Degree (ICADE E2) with post graduate Marketing studies. She started her professional career 30 years ago. Long experience in different local and multinational companies and diverse environments endorsed her adaptability to different business management styles and cultures. She has worked in Fast Moving Consumer Goods and Hospitality industry in leading companies such as Hachette, Unilever, Yum! and AmRest. She held responsibility for different cultural settings such as Israel, Turkey, Spain and Portugal, and different business areas: Marketing, Sales, Human Resources, General Management.

She was a Board member of the company which operated Pizza Hut and KFC brands in Spain, member of KFC Brand Council of Europe and worked as industry representative for different National Environmental projects. Co-Founder and Managing Director of Kenchic (latter Restauravia) – the company that in 2004 owned 14 KFC restaurants and till 2010 expanded to close to 100 units through organic growth and the acquisition of La Tagliatella. Following the acquisition of Restauravia by AmRest in 2011 she was appointed as Division President, and latter Owned Brands (La Tagliatella and Blue Frog) President.

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"La Tagliatella" is an Italian food dine in restaurant chain. Maybe this will be an additional arm with which to expand the 'Restaurant Brands' brand family in the future? 'Operational separation' between Restaurant Brands and Amrest (as per my quoted text above) does not preclude pooling ideas at the conceptual level.

SNOOPY

[Snoopy]

Slide 24 of AP2020 reveals a new emphasis going forwards. With 69 Southern Californian KFC restaurants now in the fold, 'YUM Pacific' as I call Restaurant Brands these days, now have more than half their operations outside of New Zealand. The global 'base footprint' is complete. And what seemed like a fanciful goal stated in FY2018, to become a billion dollar sales organisation ($740.8m over FY2018), is looking inevitable ($892m achieved during Covid-19 affected FY2020).

I have recently published a post (this thread no.2651) suggesting that RBD, on historical multiples is significantly overvalued. However, these FY2020 results were earned under the difficult shadow of the Covid 19 pandemic. The sharemarket is always forward looking. Hawaii and Australia were relatively unaffected because certain sales restrictions in their respective Covid-19 environments were able to be offset by doing business in other channels. So what happens to the FY2020 result if you:

1/ Make suitable adjustments for the New Zealand lock-down Covid-19 effect?
2/ Include a full twelve month's sales from the Californian acquisition (not just four months)?

1/ New Zealand Effect

The 'Directors Report to Shareholders' for FY2020 shows:

1/ Lost sales of $40m over a five week 'level 4' lock-down period, partially offset by
2/ $22m of wage subsidy payments, that nevertheless did not cover the wage bill
3/ The company paid out $2.5m in top up wages ($0.5m per week over a five week lock down period).

To get a feel for the 'EBITDA effect' of all that, we need to take out the "Covid shock" by looking at the EBITDA margin for these businesses in 'normal times'. For 'normal times' I am looking at the AR2019(2) for the ten months ending 31st December 2019 (the previous reporting period just before the pandemic hit.) Over this period I have combined the EBITDA figures for KFC, Pizza Hutt and Carl's Junior, and divided that total by their respective combined sales total. That gives an estimate of the 'EBITDA margin' for the whole New Zealand business in 'normal times'.

($66.1m + $0.9m + $1.3m) / ($308.4m + $28.4m + $29.9m) = $68.3m/$366.7m = 18.6%

This means with $40m of lost sales, RBD NZ lost an estimated : $40m x 0.186 = $7.4m of incremental EBITDA.

Under normal operating conditions, the above EBITDA earnings figure is derived after wages have been paid. Under the Covid-19 lock-down, $22m of wage subsidies were paid by the government with no associated restaurant revenues. This means to 'normalise income', we need to remove the $22m of government subsidy from the income statement. But at the same time, we need to add back in as income of $22m that can be distributed as 'company paid salaries'. These are salaries that would have been funded by sales, had those sales been allowed to occur under the Level 4 lock down. The funding for these 'company paid salaries' is from ordinary revenue, upstream of the EBITDA calculation. You can even think of salaries as a revenue funded 'company salary provision' that is passed on to employees if you like.

Things not affected by the lock downs include the depreciation of fit-outs of premises and the amortisation of various franchise agreements. In other words when calculation the incremental amount of EBIT it is the same as the incremental amount of EBITDA because the 'D' and 'A' components deducted in the EBIT calculation (EBIT=EBITDA-D-A) do not change. So the incremental gain in EBIT is also $7.4m.


Californian Operations

From the directors annual summary

"In $NZ terms the California operations contributed $NZ51.924 million in revenues and $NZ8.516 million in EBITDA (before IFRS 16) for the four month period from 2 September 2020."

Annualising this over 12 months equates to $NZ155.772m in revenues and $NZ25.548m in EBITDA. Thus the incremental EBITDA for a 12 month period would have been $NZ25.548m - $NZ8.516m = $NZ17.032m

If readers look at the detailed segment breakdown for FY2020 ( AC2020 Note 1), they will see something extraordinary. There is no franchise fee amortisation and only minimal depreciation for 69 Californian restaurants! EBIT for four months is listed as $NZ5.127m. I have to assume this is a timing issue, and in no way reflects four monthly costs let alone what might be expected over a year. Given that these restaurants are similar in number and franchise breakdown to RBD's Australian portfolio of 70 restaurants, I am going to use the Australian Depreciation and Amortisation figures to adjust the disckosed EBITDA figures to EBIT.

Annualised Californian EBIT for 2020 = $NZ25.548m - $NZ8.684m - $NZ0.464m = $NZ16.400m

Incremental EBIT for 12 month Californian division = $NZ16.400m - $NZ5.127m = $NZ11.273m


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Now we have worked out the normalising changes to the EBIT and EBITDA figures as we move into FY2021, let's see what difference that makes to the company valuation.

SNOOPY

[Snoopy]

Now we have worked out the normalising changes to the EBIT and EBITDA figures as we move into FY2021, let's see what difference that makes to the company valuation.

The following valuation is based on historical earnings as listed in the FY2020 annual accounts that covered the twelve month period, included Covid-19 lock-downs, ended 31-12-2020. In contrast to the last iteration, I have attempted to remove the effect of Covid-19. I have also annualised the contribution of the Californian division that was acquired only part way through the year. These two changes make things more representative of the earnings we might expect to see from RBD over FY2021.

It is common to value a company based on 'enterprise value'. This reflects the fact that anyone acquiring a company for the purposes of control will have to pay the market value for the shares (a positive asset) and take on the book value of the balance sheet value of the net debt (a negative asset).

Enterprise Value = Market Capitalisation +Total Debt − Cash

In this instance the 'Enterprise Value market factor' is determined by historical earnings multiples that the market has determined it would be willing to pay for similar companies. This information can be found in the 'Target Company Statement' as commissioned by 'Restaurant Brands' in response the 'Finaccess' offer to buy a controlling stake in RBD in early 2019.

	Historical EBITDA	Historical EBIT	Reference
As Calculated	$106.785m	$69.958m	My post 2650
plus Remove NZ Cov19 Effect	$7.400m	$7.400m	My post 2653
plus Annualize Californian earnings	$17.032m	$11.273m	My post 2653
equals Forecast FY2021 earnings {A}	$131.137m	$88.631m
Market Multiple {B}	10.9	18	RBD Commissioned Independent Advisors Report p32
Net Bank Debt @ 31-12-2020: (Total Bank Debt - Cash) {C}	$200.732m	$200.732m	AC2020 'Balance Sheet'
Enterprise Value @ 31-12-2020: {A} x {B} - {C}	$1,228.661m	$1,394.626m
No. of Shares on Issue@ 31-12-2020	124.759m	$124.759m
Enterprise Value 'per share'	$9.85	$11.19

The share price closed at $12.45 on 10-03-2021 You could argue that since Covid-19 there has been a 'flight to safety' and those companies supplying staples (like food) have been re-rated. You could also argue that lower market interest rates have themselves pushed share valuations higher. However the premium that the market is pricing into these shares certainly exists (between 11% and 26%). Yet for the first time it is becoming clear that under Finaccess management, the company is now powering ahead in value from where company was valued at takeover time ($9.45 in early 2019). Good as this company is, it looks to me to be too highly priced to reflect any type of historical norm fair value. Consequently I would continue to suggest new investors avoid putting money into RBD at these prices.

SNOOPY

discl: who nevertheless intends holding onto my own residual 'post controlling takeover' shareholding!

[Snoopy]

'Margins' in this context means 'Net Profit Margins'. 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 on-going 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 on-going

2017: $30.567m / $517.549m = 5.9%
2018: $40.361m / $766.289m = 5.3%
2019(1): $42.181m / $824.9m = 5.1%
2019(2) (a): $45.7m / $867.1m = 5.3%
2020: $46.7 / $924.778m = 5.1%

Notes

(a) Revenue annualised in my post 2622

The profit margin is back to its all time low of recent times. Our Russel has continued his object lesson in how to reduce net profit margins. Growth in revenue is all very well. But if you are not increasing your profit as a percentage of revenue, and you have to employ new equity to create your growth, 'long term' this can be a formula for standing still on an earnings per share basis.

Conclusion: FAIL TEST

I would like to make some more comment on the statistic that 'sunk' my Buffett style analysis for RBD. I think it is interesting to compare what happened at RBD net profit margins to a couple of other NZX listed players in the 'fast meal industry' over periods that represent a 'before lock down' and 'during lock down' comparative time frames.

Net Profit Margins	Pre Covid 19 period	Post Covid 19 Period	Reference
My Food Bag	4.1%	7.2%	HY2019(30-09-2019) cf HY2020(30-09-2020)
Burger Fuel Group	5.2%	3.7%	HY2019(30-09-2019) cf HY2020(30-09-2020)
Restaurant Brands	4.5%	2.8%	HY2019(30-06-2019) cf HY2020(30-06-2020)

There is an obvious disconnect with 'My Food Bag' improving their performance through the Covid-19 period while the others declined. This is explained by both 'Burger Fuel' and 'Restaurant Brands' having to close all their NZ restaurants during the Level 4 lock-down. The shutting down of dining options ironically was a boost to 'My Food Bag'. From Level 3 onwards, MFB were able to provide relief to outgoing kiwis not used to shopping, planning and cooking seven days worth of meals in their own homes. The more pertinent point to observe is that the net profit margins at RBD are nothing special. So the inability of RBD to raise margins is a real weakness in wider industry terms.

Now here are some slightly comparable statistics from the various divisions of RBD over FY2020

Territory	EBITDA Margin
New Zealand	18.5%
Australia	13.7%
Hawaii	15.6%
California	16.4%

That table would suggest that the latest Californian acquisition is a fantastic acquisition only just shy of NZ levels of profitability. However the key figure to focus on is 'I' and that is not found in the table. Net debt has blown out by $80m with the Californian acquisition. At an indicative interest rate of 4.3% this represents an additional annual interest bill of $3.4m.

EBTDA Margin = [$US5.8m - ($NZ3.4m x 0.7 x 4/12)] / $US35.6m = 14.0%

Adding in the incremental interest charge, the net result is the Californian acquisition has decreased the net profit margin of the company, despite the encouraging EBITDA margin of the acquisition.

This is an example of what Warren Buffett terms 'The Institutional Imperative', or growing by acquisition for growth's sake (the much touted one billion dollar sales goal) . 'The Institutional Imperative' is the drive to grow the size of the company with no regard for any decrease in profit generating efficiency, in this case 'net profit margin'. The end result of this growth process, if it continues, is that eventually a company will likely no longer be able to earn its cost of capital. Restaurant Brands are a long way from that state, but they are on that path. The fact that each region has their own chief executive and operating structure would suggest there are few inter-regional 'economies of scale' that the international umbrella structure of 'Restaurant Brands' can bring to this multi-regional company.

The relatively low profitability, in industry terms, means Restaurant Brands cannot respond to future competition by spending, without reducing their profitability to bottom of the industry levels. And if competition is liable to severely disrupt Restaurant Brands over the next ten years, that means the 'Buffett Growth Model' will not work as an analysis tool.

SNOOPY

[BlackPeter]

Anybody else had a look at their annual report (published 31 March)? I guess it is full of exciting pictures of fatty unhealthy foods, the balance sheet has more debt (as well as in proportion) as ever - their liabilities to asset ratio is now above 80%. Who knows, maybe they want to turn into a bank and decided to start with rising the liabilities?

Obviously - the frugal equity helps to keep a two digit ROE ​... I knew there must be something good about loads of debt.

NTA dropped from negative 26 cents to negative 73 cents per share ... maybe they did eat too many Californian fast food outlets?

Otherwise - chair is excited about the future. One Billion turnover - here we come! As long as people like to eat heaps of unhealthy and fat food in order to inherit the properties of the food they eat this must be the winner in anybodies portfolio. Reminds me of Tabaco company shares some decades ago ...

Maybe mix with some FPH and other health care shares to keep profiting from RBD's victims oops - customers, when they need medical help to deal with the consequences of diabetes and obesity.

This leaves only one question: "Do you want fries with that?"

Discl: Not sure why, but I could resist ... not holding :

[Gonzo]

Anybody else had a look at their annual report (published 31 March)? I guess it is full of exciting pictures of fatty unhealthy foods, the balance sheet has more debt (as well as in proportion) as ever - their liabilities to asset ratio is now above 80%. Who knows, maybe they want to turn into a bank and decided to start with rising the liabilities?

Obviously - the frugal equity helps to keep a two digit ROE ​... I knew there must be something good about loads of debt.

NTA dropped from negative 26 cents to negative 73 cents per share ... maybe they did eat too many Californian fast food outlets?

Otherwise - chair is excited about the future. One Billion turnover - here we come! As long as people like to eat heaps of unhealthy and fat food in order to inherit the properties of the food they eat this must be the winner in anybodies portfolio. Reminds me of Tabaco company shares some decades ago ...

Maybe mix with some FPH and other health care shares to keep profiting from RBD's victims oops - customers, when they need medical help to deal with the consequences of diabetes and obesity.

This leaves only one question: "Do you want fries with that?"

Discl: Not sure why, but I could resist ... not holding :

my free voucher last week

[winner69]

Was going to post something about YUM brands loving the way KFC going in the US ....but link.wont work

[Sideshow Bob]

Taco Bell hits Chch......even with rent-a-crowd!

Taco Bell opens in Christchurch | Otago Daily Times Online News (odt.co.nz)

[BlackPeter]

Taco Bell hits Chch......even with rent-a-crowd!

Taco Bell opens in Christchurch | Otago Daily Times Online News (odt.co.nz)

Looks like they rented the blue sky as well ... just wondering where to hire that (unless it is an old photo ...)?