RBD - Restaurant Brands

[Snoopy]

Hey Snoops ...did you see this piece on our Russel

Don’t even bother do much analysis on RBD these days because no matter they do the share price keeps defying logic and keeps climbing. Weird as profit climbs rather slowly it’s PE goes up even faster.

You wouldn’t really call their profit trend really startling would you.

Still got most of the ones I bought around a buck many years ago. Something made me have a ‘never sell’ mentality and that’s worked out fine eh. Funny I’ve never seen it as a buy since but who cares as it’s been very rewarding anyway.

Still love the fact you make more out of investing in greasy chicken than retirement villages ...should have been totally committed to greasy chicken.

I take it you still have heaps

Looking back I shouldn't have sold most of my shares to the Mexican's Winner! Sounds like you ended up resisting and it has paid off for you. Still I am not jealous for, as you say, RBD has been overvalued ever since and I can't really complain about the mid $9 range price I got for the bulk of my holding. It was a good price by any conventional valuation metrics, and if someone did better than me out of the deal then good on them. Yes I still have my residual shares although residual might be the wrong adjective as it might leave the wrong impression. The truth is my portfolio got re-rated from something grossly overstocked with RBD shares to something more balanced.

That picture of Russel is a bit spooky though. I wondered what Russel's brother was doing in the background of the photo until I realised I was looking at a fibreglass recreation of 'the colonel'. The glasses, the skin colour, the general build - it is almost uncanny. Even Russel's hair is getting a bit of the colonel's colour blended in. All Russel needs is that bit of beard between his mouth and chin and the transformation would be complete. I reckon the name 'Colonel Creedy' has a nice ring to it too!

SNOOPY

[ratkin]

Thoughts on the sales update?

[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'.

'Restaurant Brands' might now be better named as 'YUM Pacific'. YUM Brands is the master franchise holder of the 'KFC' , 'Pizza Hut' and 'Taco Bell' brands globally. 'Restaurant Brands' operates franchised YUM branded restaurants and is looking to add their own unique restaurant designs and menu adaptations and local promotions. This tailors the offering to meet the expectations of consumers around the Pacific Rim: New Zealand, Australia, Hawaii, Guam and now California. In California, a conditional deal is in place to acquire 70 both 'pure KFC' and 'KFC/Taco Bell paired' restaurants. 'Restaurant Brands', aside from being a Pacific Regional YUM Franchise, operate 18 'Carl's Junior' Burger themed restaurants in NZ. But they are not rolling out any more 'Carls Junior Restaurants'. And the niche chain of 'Starbucks' coffee houses that 'Restaurant Brands' used to run in NZ has been sold.

'Restaurant Brands' are already the largest KFC franchise operator in New Zealand and New South Wales in Australia. Likewise they have a strong position in greater Hawaii with 'Taco Bell' and 'Pizza Hut'. 'Pizza Hut' in NZ continues to be under profitability pressure (most outlets are now independently franchised and more independent franchising is planned) even if it remains the second largest Pizza operator by footprint (now 102 NZ stores). The are 439 KFC stores in California

https://leadsdeposit.com/list-of-all...ons-in-the-us/

and 'Restaurant Brands' are looking to own 70 of those. It is RBD's intention to strengthen their position in California and Australia over time, both buying existing stores and opening new ones. Interestingly, new RBD Chairman Jose Pares sees California as 'relatively underpenetrated' by KFC' (AR2019(2) p26).

The position of 'Carl's Junior' in The NZ environment is of a 'niche payer'. It would not surprise me, now that RBD is seeing 'Taco Bell' as the prime development goal for building new restaurants in Australia and NZ (60 stores over the next 5 years), to see 'Carl's Junior' sold off much as 'Starbucks' was last year.

The company mission goal now is the 'big dollar target', chasing $1billion in annual revenue (annualised revenue is already at $867.1m ( AR2019(2) p6 ). To reach this goal dividends have ceased and the earnings generated from the business is being reinvested. But will this single minded growth goal see the balance sheet stretched too far in a post Coivid-19 world where debts remain but revenue to service those debts becomes less certain?

Conclusion: In answer to 'Buffett Test 1', PASS TEST (as regards being a major market player). RBD are very significant players with 'KFC'/'Pizza Hut' in NZ,' KF'C' in New South Wales and 'Taco Bell' and 'Pizza Hut' in Hawaii. 'KFC' in California and 'Taco Bell' in Australia and N.Z. are developing market positions and are likely to form the bulk of future growth plans.

Restaurant Brands are a 'favoured' franchise operator for KFC, Pizza Hutt and Taco Bell, concepts owned by ultimate franchise owner USA based 'YUM Brands'. Restaurant Brands has a clear 'base position' in four Pacific Rim markets: New Zealand, East Coast Australia, Hawaii and California USA. They are dominant players in takeaway chicken market in New Zealand and New South Wales. They are strong players in the Pizza market in New Zealand and Hawaii. They are emerging players in the Mexican food market in NZ and NSW as 'Taco Bell' plans to roll out a total of 60 restaurants in these two markets. They are relatively weak players in the burger market in NZ, with Carls Junior well behind competitor international operators like 'Burger King' and 'McDonalds'.

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).

KFC development will now focus on 'new builds' and 'acquisition of existing small franchisees'. 'Acquisition of existing small franchisees' was not mentioned in the context of New Zealand, because RBD has largely already gobbled up such opportunities (although KFC Kapiti was acquired this year). It wasn't mentioned in the context of Hawaii either. The KFC franchise holder there is privately owned 'Kazi Foods Corp of Hawaii' (founded 1998). There are 15 KFC franchises in Hawaii run by 'Kazi Foods'. So I was very surprised to learn that RBD plans to open their own first KFC store in Hawaii by 2022. The parent franchise owner 'YUM Brands' must have approved this, and that has to be a slap in the face for existing KFC franchisee Kazi Foods. KFC in Hawaii is a developing situation that is worth watching.

The upgrade of Pizza Hutt continues with the downgrade of 'large footprint restaurants' to 'delco delivery outlets'. This is something that has already happened in NZ but is a change that now seems to be sweeping Hawaii. As a slap in the face for RBD's New Zealand Pizza Hutt workers, there are now only 13 company owned stores left (the balance of 90 stores are now in the hands of independent franchisees). RBD still benefits from the independent franchisees as the YUM approved wholesale supplier for proprietary Pizza Hutt goods.

The 'Taco Bell' brand is still being developed in New Zealand and Australia, with no plans to expand this format from RBD's existing bases in Hawaii and California. This strikes me as a warning sign that the Australasian expansion is being done at the behest of master franchise holder YUM, and may not be profitable for RBD. It will be profitable for YUM though, because they get paid a franchise fee based on restaurant turnover, irrespective of whether RBD makes profits out of these stores or not.

Finally 'Carl's Junior' restaurants, the only non-Yum aligned restaurant brand, are back on the new build list in NZ, but only in smaller store formats. This is possibly on the increasing importance of delivery sales to the fortunes of Carl's Junior. Delivery sales do not require a lease on an expensive sprawling restaurant.

Restaurant Brands strong KFC position in New Zealand and New South Wales, well traded Pizza Hutt operation in NZ and Hawaii, and the strength of Taco Bell in Hawaii earns a strong 'Yes' when answering the question: Do you hold strong market positions. The not so strong market positions, Taco Bell in Australia and NZ and Carl's Junior in NZ can be thought of as 'growth beachheads' that are currently not material to the overall Restaurant Brands operation.

Conclusion: Yes, PASS TEST

SNOOPY

[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

2016: $24.207m /102.871m = 23.5cps
2017: $30.567m /122.843m = 24.9cps
2018: $40.361m /123.629m = 32.7cps
2019(1): $42.181m /124.759m = 33.8cps
2019(2): $45.7m /124.759m = 36.6cps


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

2017: $30.567m /122.843m = 24.9cps
2018: $40.361m /123.629m = 32.7cps
2019(1): $42.181m /124.759m = 33.8cps
2019(2) (a): $45.7m /124.759m = 36.6cps
2020 (b): $49.8m /124.759m = 39.9cps

Notes

(a) Net Profit of $30.1m normalised as per AR2019 p16. Added back unaudited earnings for the two months of January 2019 and February 2019 to make a twelve month earning period (+$7.1m). Added back the net effect of adjusting to the new lease standard IFRS16 (+$4.5m), and removed a net +$2.50m of after tax losses unrelated to normal trading.

$30.1m + $4.5m +$4.0m +$7.1m = $45.7m

(b) Net Profit of $30.9m normalised (from Annual Profit Release 2020 p2). Added back the net effect of adjusting to the new lease standard IFRS16 (+$7.0m), and added back a net +$8.8m of higher net expenses outside of normal trading. This includes $4.1m of incremental NZ Lock-down costs including a wage subsidy shortfall payout of $0.5m per week), and $4.3m in acquisition costs relating to the 69 restaurants purchased in California. This year contains four months of operations from the Californian restaurant acquisition:

$30.9m + $7.0m + $8.8m + 0.72($4.3m) = $49.8m

Finally the profit contains a one off NZ government payment of $22.013m, the NZ government Covid-19 wage subsidy. The company was eligible for this on account of the government mandated closing of all New Zealand stores from 26th March 2020 to 27th April 2020, as part of the Covid-19 Level 4 lockdown. The government payment fell short of covering all NZ wages by $0.5m per week (around $2.5m in total).

Conclusion: PASS TEST

SNOOPY

[Rawz]

Reataurant Brands are a 'favoured' franchise operator for KFC, Pizza Hutt and Taco Bell, concepts owned by ultimate franchise owner USA based 'YUM Brands'. Restaurant Brands has a clear 'base position' in four Pacific Rim markets: New Zealand, East Coast Australia, Hawaii and California USA. ...

Restaurant Brands strong KFC position in New Zealand and New South Wales, well traded Pizza Hutt operation in NZ and Hawaii, and the strength of Taco Bell in Hawaii earns a strong 'Yes' when answering the question: Do you hold strong market positions. The not so strong market positions, Taco Bell in Australia and NZ and Carl's Junior in NZ can be thought of as 'growth beachheads' that are currently not material to the overall Restaurant Brands operation.

Conclusion: Yes

SNOOPY

Thank you for your posts, I enjoyed reading them and share your yes conclusion.

RBD is Mr dependable in my book.

[Snoopy]

Net Profit excl. non trading / Shareholder Equity EOFY

2016: $24.207m / $75.617m = 32.3%
2017: $30.567m / $192.059m = 15.9%
2018: $40.361m / $201.608m = 20.0%
2019(1): $42.181m / $224.670m = 18.8%
2019(2): $45.7m / $207.994m = 22.0%

Conclusion: PASS TEST

Net Profit excl. non trading / Shareholder Equity EOFY

2017: $30.567m / $192.059m = 15.9%
2018: $40.361m / $201.608m = 20.0%
2019(1): $42.181m / $224.670m = 18.8%
2019(2): $45.7m / $207.994m = 22.0%
2020: $49.8m / $230.472m = 21.6%

Conclusion: PASS TEST

SNOOPY

[Snoopy]

Here is the reason I was getting all 'hot and bothered' about calculating an annualised revenue figure in my post 2622 on this thread.

'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

2016: $24.207m / $404.095m = 6.0%
2017: $30.567m / $517.549m = 5.9%
2018: $40.361m / $766.289m = 5.3%
2019(1): $42.181m / $824.9m = 5.1%
2019(2): $45.7m / $867.1m = 5.3%

The profit margin hasn't got any worse, which is a positive. But it hasn't really got any better either. I call it 'bouncing around a new bottom'. 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

'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: $49.8 / $924.778m = 5.4%

Notes

(a) Revenue annualised in my post 2622

The profit margin is still below FY2017, when the US based expansion started. 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

SNOOPY

[Snoopy]

Another year into the 'great overseas expansion'. To reprise what it was (and is), here is how the RBD 'overseas managed restaurant landscape' has changed since EOFY2016 (28-02-2016) so far:

27-04-2016: QSR Pty Ltd, operating 42 KFC Restaurants in New South Wales acquired.
13-12-2016: 2 KFC stores in New South Wales acquired from Samesa Pty Limited.
13-12-2016: 3 KFC stores in New South Wales acquired from Oshamma Pty Limited.
07-03-2017: Pacific Island Restaurants 'PIR', now 37 Pizza Hut and 37 Taco Bell stores acquired.
17-07-2017: 3 KFC stores in New South Wales acquired from Vida Rica Pty Limited.
28-08-2017: 10 KFC stores in New South Wales acquired from YUM Restaurants International

In addition to these purchases one incremental KFC store was opened in Q3 FY2018 and a second in Q4 FY2019(2). A further KFC store was acquired in December 2019. Very recently a couple of Taco Bell Restaurants have opened in NSW too, but these are not material to the overseas strategy yet.

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 PLUS the fact that no dividends have been paid by RBD since June 2018.. Those unpaid dividends become retained earnings that can then be spent on new restaurant initiatives. I will use the change in shareholders equity from the reporting date before the cash issue (EOFY2016) to the end of FY2019(2). This is the first year that all of the Australian operations and Hawaiian operations have been operating as 'bedded in units'.

	EOFY2016	Change	EOFY2019(2) (Annualised)
Normalised Earnings {A}	$24.207m		$45.7m
No. of Shares {B}	102.871m		124.758m
eps {A}/{B}	23.53c	+10.28c {D}	36.6c
Owner Equity {C}	$75.617m		$207.994m
Owner Equity per share {C}/{B}	74c	+$0.93 {E}	$1.67
Return on Incremental Equity / Share {D}/{E}		+11.0%

The 'overseas expansion period' now covers four years. The above result is a significant improvement on the "Return on Incremental Equity / Share" over the previous two compounded periods (9.5% over two years and 9.7% over three years respectively). Is this proof that the overseas expansion strategy is working? All the new capital raised in the cash issue in October 2016 and those retained dividends has now had sufficient time to be deployed. But much of this business expansion funding is by debt. Using debt will improve the 'Return on Incremental Equity' / 'Share' figure. There is nothing wrong with using debt for expansion of course, provided the debt load does not become excessive. We need to investigate whether excessive debt is being used!

Another year into the 'great overseas expansion'. To reprise what it was (and is), here is how the RBD 'overseas managed restaurant landscape' has changed since EOFY2016 (28-02-2016) so far:

27-04-2016: QSR Pty Ltd, operating 42 KFC Restaurants in New South Wales acquired.
13-12-2016: 2 KFC stores in New South Wales acquired from Samesa Pty Limited.
13-12-2016: 3 KFC stores in New South Wales acquired from Oshamma Pty Limited.
07-03-2017: Pacific Island Restaurants 'PIR', now 37 Pizza Hut and 37 Taco Bell stores acquired in Hawaii USA.
17-07-2017: 3 KFC stores in New South Wales acquired from Vida Rica Pty Limited.
28-08-2017: 10 KFC stores in New South Wales acquired from YUM Restaurants International

In addition to these purchases one incremental KFC store was opened in Q3 FY2018 and a second in Q4 FY2019(2). A further KFC store was acquired in December 2019. Very recently a couple of Taco Bell Restaurants have opened in NSW too, but these are not material to the overseas strategy yet.

24-10-2018: Sale of Starbucks franchised 22 stores to Tahua Capital for $4m.
23-12-2019: 70 KFC (including 11 combined KFC /Taco Bell) stores acquired in Southern California USA from 'Great American Chicken Corp' (acquisition completed September 2020)

Now back to some analysis. 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 PLUS the fact that no dividends have been paid by RBD since June 2018.. Those unpaid dividends become retained earnings that can then be spent on new restaurant initiatives. I will use the change in shareholders equity from the reporting date before the cash issue (EOFY2016) to the end of FY2020. I note that the Californian market acquisition only contributed 4 months of earnings towards the FY2020 year as a consequence of the acquisition date of those restaurants.

	EOFY2016	Change	EOFY2020
Normalised Earnings {A}	$24.207m		$49.8m
No. of Shares {B}	102.871m		124.758m
eps {A}/{B}	23.5c	+16.4c {D}	39.9c
Owner Equity {C}	$75.617m		$230.472m
Owner Equity per share {C}/{B}	74c	+$1.11 {E}	$1.85
Return on Incremental Equity / Share {D}/{E}		+14.8%

The 'overseas expansion period' now covers five years. The above result is a significant improvement on the "Return on Incremental Equity / Share" over the previous three compounded periods (9.5% over two years and 9.7% over three years and 11.0% over four years respectively). Is this proof that the overseas expansion strategy is working? All the new capital raised in the cash issue in October 2016 and those retained dividends has now had sufficient time to be deployed. But much of this business expansion funding is by debt. Using debt will improve the 'Return on Incremental Equity' / 'Share' figure. There is nothing wrong with using debt for expansion of course, provided the debt load does not become excessive. We need to investigate whether excessive debt is being used!

SNOOPY

[Snoopy]

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!

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!

	FY2017	FY2018	FY2019(1)	FY2019(2)	FY2020
Bank Term Debt	$46.482m	$166.815m	$145.853m	$154.326m	$236.398m
less Cash and Cash Equivalents	($70.390m) (i)	($10.410m)	($15.034m)	($34.965m)	($35.666m)
equals Net Debt {A}	NM	$156.405m	$130.819m	$119.361m	$200.732m
Declared NPAT {B}	$25.595m	$35.466m	$35.741m	$41.7m (ii)	$37.942m (iii)
MDRT {A}/{B}	0 years	4.4 yrs	3.7 yrs	2.9 yrs	5.3 yrs

Notes

(i) There is 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. $94m 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

(ii) $30.1m+$4.5m+$7.1m = $41.7m (From p16 AR2019(2) adjusting for IFRS 16 interest payments and annualizing 10 month year)

(iii) $30,938m+($9.741m-$2.737m) = $37.942m (From Note 1.1 FY2020 Accounts adjusting for IFRS 16 interest payments)





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 39.9cps from EOFY2017 to EOFY2020 over the ensuing four years. 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

According to those rules RBD is now a high debt company. But the debt levels are not as high as I predicted last year. Despite Covid-19, this points to the underlying assets of the company performing well. Indeed the directors report says:

"The financial results for the California division have been significantly above expectations."

Factor in a full twelve months earnings contribution from California and (hopefully) less Covid-19 interruptions over FY2021 and I think RBD will drop down to being a 'medium debt' company. With not insignificant debt, the well signalled expansion of Taco Bell in Australia and New Zealand to more than 60 restaurants, other incremental growth and a well planned refurbishment program for existing restaurants, I would not be expecting any dividends from my RBD shares going forwards.

SNOOPY

[Snoopy]

We can't use the 'Capitalised Dividend Valuation Model' to value RBD any more, because dividends have been cancelled. Yet the company doesn't tick all the boxes to allow a Buffett style growth valuation model to be used either. So what to do? It looks like I will be forced to use an earnings valuation multiple based on EBIT and/or EBITDA. Grant Samuel did this when valuing RBD for the 'Finacces's takeover.

The problem here is that, due to the adoption of NZ IFRS 16, the calculation of both EBIT and EBITDA has changed. From AR2019(2) p80:

	Pre NZ IFRS 16	Adjustments	Post NZ IFRS 16
EBITDA before G&A Expenses	$115.974m	$31.511m	$147.485m
General & Administration Expenses	($29.427m)	$0.857m (2)	($28.570m)
EBITDA after G&A Expenses	$86.547m	$32.368m	$118.915m
less Depreciation	($25.356m)	($22.395m) (1)	($47.751m)
less Amortistion	($2.178m)	$0m	($2.178m)
equals EBIT before Other Items	$59.013m	$9.973m	$68.986m

Notes

(1) This adjustment figure is the 'lease depreciation', which did not exist as a separate depreciating item under the superseded accounting standard.

This makes things difficult when using historical EBIT and EBITDA multiples as benchmarks. However, in this case the authors of the annual report have bridged the 'old' and the 'new' way of looking at things. Refer to AR2019(2) sections 1.1, 14,15,16,17,18 and 19.

(2) Why the general and administrative expenses have dropped under NZ IFRS16 is not explained. My guess is that 'head office', not being part of the 'earnings machine', operated under the old NZ IAS 17, on a separate 'finance lease' arrangement. With the adoption of NZ IFRS16, and the distinction between finance leases (that were on the balance sheet), and operating leases (which up to that point were not on the balance sheet) was removed. At that point the former 'finance lease' at head office was reclassified as an 'operating lease'. That replaced what was an 'expense item' with a 'depreciation item', that 'on paper' reduced the General & Administration running costs. In reality these costs were transferred to an alternative deduction in the accounts. I don't know if I am right about this. But it seems the most logical way to explain what has happened..

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

I can't use the 'Capitalised Dividend Valuation Model' to value RBD any more, because dividends have been cancelled. Yet the company doesn't tick all the boxes to allow a Buffett style growth valuation model to be used either. So what to do? It looks like I will be forced to use an earnings valuation multiple based on EBIT and/or EBITDA. Grant Samuel did this when valuing RBD for the 'Finacces's takeover.

The problem here is that, due to the adoption of NZ IFRS 16, the calculation of both EBIT and EBITDA has changed. Unlike the previoushttps://talkmotorsport.co.nz/ year where this work was done for us (AR2019(2) p80), I have to go through the accounts 'line by line' to derive pre IFRS 16 EBIT and EBITDA figures. This I have dome to compile the table below.

	Pre NZ IFRS 16	Adjustments	Post NZ IFRS 16	Method or Reference
NZ Govt Wage Subsidy	$22.013m	$0m	$22.013m	Accounts 2020 Note 1 / Calculated / Accounts 2020 Note 1
EBITDA before G&A Expenses	$126.250m	$43.907m	$170.157m	Accounts 2020 Note 1 / Calculated 2nd / Calculated
General & Administration Expenses	($41.478m)	$1.012m (1)	($40.466m)[/https://talkmotorsport.co.nz/TD] [TD=align:center]Accounts 2020 Note 1 / This Post Note 1 / Calculated
EBITDA after G&A Expenses	$106.785m	$44.919m	$151.704m	Calculated / Calculated 3rd / Calculated 2nd
less Depreciation	($34.087m)	($30.908m) (2)	($64.995m)	Accounts 2020 Note 1 / Accounts 2020 Note 14 / Calculated
less Amortistion	($2.740m)	$0m	($2.740m)	Accounts 2020 Note 1 / Calculated / Accounts 2020 Note 1
equals EBIT before Other Items	$69.958m	$14.011m	$83https://talkmotorsport.co.nz/.969m	Calculated / Calculated 2nd /Accounts 2020 Consolidated Income + Other Expenses & Income

Notes

(1) IFRS 16 is a way to make 'operating leases' visible on the balance sheet and introduces the concept of a 'right of use asset', offset on the balance sheet by a corresponding 'lease liability'. Thus from now on 'operating leases' will become more than just a one line expense each year. In place of the one line expense, a 'right of use asset' is reduced in size as the accompanying 'lease liability' shrinks in proportion. The shrinking 'lease liability' is manifested as an 'interest expense' on lease liabilities.

Why the 'General and Administrative expenses' at RBD have dropped under NZ IFRS16 is not explained. My guess is that 'head office', being a separate location and not being part of the 'earnings machine', operated under the old NZ IAS 17, on a separate and distinct 'operating lease' arrangement. With the adoption of NZ IFRS16, the distinction between 'finance leases' (that were on the balance sheet), and 'operating leases' (which up to that point were not on the balance sheet) was effectively removed. That replaced what was an 'expense item' with a 'depreciation item', that 'on paper' reduced the General & Administration running costs. In reality these costs were transferred to an alternative deduction in the accounts. I don't know if I am right about this. But it seems a logical way to explain what has happened..

"Each lease payment is allocated between the lease liability and the finance cost. The finance cost is charged to the statement of comprehensive income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period." (AC2020 Note 14).

I could not find a specific finance cost for leases associated with 'General & Administration" for FY2020. However given the quote above. And given we know the figure for the previous year (actually a 44 week period) (AR2019(2) p80). That means we can guess this rate will be the same for FY2021, provided it is normalised to a 52 week charge.

$0.857m x 44/52 = $1.012m

(2) This adjustment figure is the 'lease depreciation', which did not exist as a separate depreciating item under the superseded accounting standard (AC2020 Note 14).


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!

SNOOPY