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  1. #2621
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    Default

    Second Taco Bell store opening shortly in Auckland, might grab a few mates and try out New Lynn's store tomorrow

    https://www.nzherald.co.nz/business/...ectid=12338376

  2. #2622
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    Default Annualising the FY2019(2) Result

    Quote Originally Posted by Ecks View Post
    SP getting close to pre-Covid!
    RBD is certainly a 'darling of the market'. The latest FY2019 Annual Report, the one with the blue cover, ( I say latest as there have been two because of the balance date realignment from end of February to end of December), shows revenue and profit decline. But this is because the 'second' FY2019 reporting year covered only 10 months. The report then talks about annualising profit and revenue figures, without spelling out how this was done. You have to read the chairman's AGM address to find that out (for the NPAT at least). The associated presentation 'Slide 3' shows that the unaudited eight weeks to the end of February 2020 results have been added to the FY2019 10 month result to make up a full calendar year. A further non trivial profit adjustment was the adoption of NZ IFRS16 which changed the accounting treatment of rental property lease payments.



    Annualising Net Profit Reference
    FY2019 NPAT to 31-12-2019 as declared $30.1m
    add Unaudited NPAT for 01-01-2020 to 28-02-2020 $7.1m
    add Negative effect of adopting NZ IFRS 16 on NPAT $4.532m AR2019(2) p55: $6.076m - $1.547m = $4.532m
    add Other Income and Expenses (*) $4.0m AR2019(2) p55: $0.722m - $5.338m = $4.616m (?)
    equals Comparative NPAT for FY2019(2) $45.7m
    Comparative EBITDA for FY2019(2) $137.1m (As stated in Chairman's address)

    (*) 'Other Income and Expenses' in previous years were income and expenses relating the the wholesale support functions that RBD provides to mainly independently franchised Pizza Hutt outlets in New Zealand.


    Annualising NZ Revenue

    There was a vague reference in AR2019(2) p16 on annualising revenue:

    "On a like for like brand footing (total brand sales for the group) are up approximately 5% (when compared to the 52 week comparative period).

    The chief executive's {Russel Creedy's) address to the AGM contained a little more information:

    "When normalised for 12 months, New Zealand sales were up +3.5% to $434 million."

    If we refer back to AR2019(1), the previous reporting year, NZ sales for KFC, Pizza Hutt and Carl's Junior plus 'Other Revenue' summed to:

    $356.9m + $101.0m + $31.9m + $30.9m = $520.7m

    Add a 3.5% increment onto that and I get $539m for NZ sales. That is a very large discrepancy to the $434m Russel claims as 'normalised'.

    If we refer back to AR2019(2) p17,18,19, the current 'year' (actually 10 months), NZ sales for KFC, Pizza Hutt and Carl's Junior summed to:

    $325.8m + $85.2m + $29.9m = $440.9m

    This is above Russel's normalised NZ $434m figure for the whole year! How can this be? Something very strange has gone on with the annualising process here. Can anyone explain?


    Annualising Australian Revenue

    Moving to the Australian result, Russel says:

    "On a full year equivalent basis sales were up +5.7% or $A10 million. "

    Once again I refer back to AR2019(1) and Australian sales were listed at $A178.3m. So this implies a full year comparative sales figure over FY2019(2) of:

    $178.3m x 1.057 = $188.5m, which is an increment of $A10m. Russel and I agree on that figure at least!

    Annualising Hawaiian Revenue

    Russel made no mention of this in his address. Very disappointing considering the effort he went to annualise revenue in the other jurisdictions in which RBD operates. However, if we look in AR2019(2) we can see that total Hawaiian sales added to: $66.5m + $44.1m = $110.6m. Russell quotes $111m in his AGM address which lines up. So this is confirmation that Russel hasn't bothered to annualise the Hawaiian result.

    Annualising Revenue Conclusion

    The reporting is inconsistent across geographies, and the NZ annualised result just looks wrong. I am forced to resort to the rather vague Annual Report 2019(2) p16 reference:

    "On a like for like brand footing (total brand sales for the group) are up approximately 5% (when compared to the 52 week comparative period).

    to determine annualised company revenues. Last years revenue (i.e. from AR2019(1) ), including other income, amounted to $824.9m: $824.9m x 1.05 = $866.1m. If we look on p7 of AR2019(2) we see a revenue figure of $867.1m. That is close enough to be the same number, if you take into consideration the multiplier margin of error. From that I can conclude that the figure of $867.1m is the annualised annual revenue figure today (even though AR2019(2) doesn't specifically say that).

    SNOOPY
    Last edited by Snoopy; 10-07-2020 at 09:49 AM.
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  3. #2623
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    Default BT1/ STRONG MARKET POSITION (Top 3 in chosen market sector) [perspective FY2019(2)]

    Quote Originally Posted by Snoopy View Post
    During 2016 'Restaurant Brands' has reinvented itself. What was a 'domestic franchisee' has become a 'multi-brand international restaurant business'. The vision is now:

    "To be a leading operator of enduring and innovative Quick Service Restaurant (QSR) Brands in the jurisdictions in which the company operates."

    Since this 'change of focus', there has been a push into the Australian and in particular the New South Wales' market. Restaurant Brands now owns more KFC outlets in Sydney/ New South Wales than any other KFC operator (61 stores). Similarly the push into Hawaii, with the acquisition of 'Pacific Island Restaurants', sees them controlling the largest QSR restaurant chain in that state (with 45 Pizza Hut Stores combined with 37 Taco Bell outlets). As part of this transition, the Starbucks franchise of coffee stores within New Zealand has been sold. The KFC chain (No. 1 in the fast food chicken market) and Pizza Hut (no.2 in the Pizza market) remain as part of the stable. Restaurant Brands is now the 'master franchisee' for Pizza Hut in New Zealand, with the provincial and lower volume stores being sold off to local operators. The roll out of the Carls Junior Burger chain seems to have stalled with total chain numbers down to 18. They are not a top three market player, being behind McDonalds (167 outlets), Burger King (83 outlets) and the locally owned Burger Fuel chain (52 outlets), and Wendy's Burgers (21 outlets).

    Restaurants Brands must carefully follow the prescription of their master franchise owners for each restaurant concept. However there is some freedom and Restaurant Brands feel they can add particular value in both:

    1/ Marketing AND
    2/ Facility and supply chain management

    Conclusion: Pass Test for New Zealand, Hawaii and New South Wales (with the exception of Carls Junior in the burger market in NZ).
    '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.

    SNOOPY
    Last edited by Snoopy; 05-03-2021 at 04:17 PM.
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  4. #2624
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    Default BT2/ INCREASING EARNINGS PER SHARE TREND (one setback allowed) [perspective 2019(2]

    Quote Originally Posted by Snoopy View Post
    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
    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

    SNOOPY
    Last edited by Snoopy; 06-07-2020 at 06:40 PM.
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  5. #2625
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    Default BT3/ RETURN ON EQUITY (at least 15% for 5 years) [perspective 2019(2)]

    Quote Originally Posted by Snoopy View Post
    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
    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

    SNOOPY
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  6. #2626
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    Default BT4/ ability to raise margins at above the rate of inflation [perspective 2019(2)]

    Quote Originally Posted by Snoopy View Post
    Reprising the 'Achillies heal' from the Restaurant Brands result from last year: net profit margin.

    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

    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: $42.2m / $794.0m = 5.3%

    The profit margin hasn't got any worse, which is a positive. But it hasn't got any better either. Our Russel has given an object lesson in how to reduce profit margins.

    Conclusion: Fail Test

    PS Not tempted to top up at today's close of $8.65 either!
    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

    SNOOPY
    Last edited by Snoopy; 07-07-2020 at 08:42 AM.
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  7. #2627
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    Default Buffett Tests Overall Conclusion [perspective 2019(2)]

    Quote Originally Posted by Snoopy View Post
    A significant progression has occurred since Restaurant Brands have shifted outlook from becoming a 'domestic franchiser' to an 'international restaurant developer'. The point of failure in the 'Buffett Tests' is now the seemingly ever decreasing net profit margin.

    RBD, FY2017 and FY2018 are the periods where the great overseas expansion strategy was coming into play. In AR2018 p26 and p27, CEO Russel Creedy gives a candid interview. He says that to gain the 'growth' required for the company's strategic vision, to become a billion dollar company in revenue and market capitalization, it was necessary to buy that growth by investing overseas. Yet later in that same interview he admits that:

    "Our growth strategy also includes new store builds which incidentally generate the highest return in investment."

    Putting the two comments together, it is clear that growth overseas where you are generally buying stores rather that building them is less profitable. Sure Taco Bell in Hawaii has a high EBITDA as a percentage of sales at concept level. But this does not include the extra interest costs incurred in funding the purchase, nor the extra more bloated corporate structure behind the scenes needed to manage it.

    The ROE decline at RBD has stabilized near 20%. This is still a good figure in absolute terms, albeit well down on 30% that was regularly attainable when RBD was an NZ focussed business. Yet so great has been the drop against a background of the NZ side of the business doing well, I think questions need to be asked as to what the ROE is on the overseas side of the business, and just how far above the cost of capital are these overseas business returns?

    Taken overall it looks like RBD are on a path of increasing profits, even in eps terms, but decreasing profitability. Are there shades of Buffett's much derided management phenomenon of the 'institutional imperative' at work here? The naval analogy of the 'institutional imperative' is that our 'captains of industry' would prefer to skipper a battleship, even one with dis-functional weapons than a smaller well armed frigate.

    It is possible that RBD will be able to turn their overseas investments around, with more green field KFC projects in New South Wales and a rebuild program in Hawaii that will revamp that states restaurants so that earnings double in that state. However talk that RBD will instead look to acquire more existing restaurants on the West Coast of the United States as their prime growth plan would argue against the positive overseas growth outcome. I think Warren Buffett would be waiting to see if the overseas strategy was not going to degrade the profitability of RBD too much before investing his own money in the RBD story going forwards.
    The above is my most recent 'Buffett Conclusion' from two years ago. The story remains the same. An important statistic that RBD quote in their annual report is 'EBITDA as a Percentage of Sales'. (AR2019(2) pp17 to 21). This is important from an operational perspective. But it takes out of focus the cost of capital needed to buy these sales in the first place. If we take a look at the intangible assets on the books ( AR2019(2) Note 20, p84 ) 'Goodwill' stands at $227.841m. Of that total by far the largest is that relating to the KFC expansion into Australia ( $94.552m ) and Taco Bell and Pizza hut in Hawaii ( $120.352m ).

    Let's look at KFC Australia as an example. KFC Australia shows a very impressive 15.4% EBITDA to Sales Margin. This figure can be verified from the Segmented Results (AR2019(2) p65).

    EBITDA / Total Operating Revenue = $25.900m / $169.105m = 15.3% (Hmm, not quite sure why I don't get 15.4%, but this is close enough)

    However if we subtract the interest cost on holding the 'Australian Goodwill' from this calculation, a different picture emerges.

    ------

    Loan Balance Average Over the Year (actually ten month period, 01-03-2019 to 31-12-2019): ($154.328m + $145.823m) /2 = $150.076m
    The interest paid on loans can be found in the Cashflow statement ( p61 AR2019(2) ): $5.370m.
    Therefore, the implied overall averaged 10 month out of 12 'Interest rate' paid and averaged over all Loans is: $5.370m / $150.076m = 3.6%

    -------

    1/ This means the implied interest cost on the Australian Goodwill is: 0.036 x $95.442m = $3.436m. This is assuming that all of the Australian equity is being financed by debt. In fact some will be financed by equity. But since the cost of debt is less than the cost of equity, this will be a conservative estimate of the real funding cost.

    EBITDA (adjusted for Goodwill Holding Cost) / Total Operating Revenue = ($25.900m - $3.436m ) / $169.105m = 13.3%

    That is still good but getting ever closer to RBD's cost of capital. which RBD record as 8.7% for KFC in Australia. So the 'value accreting margin' in Australia for KFC is:

    13.3% - 8.7% = 4.6%

    2/ Now compare that with the equivalent figure for KFC in New Zealand

    The implied interest cost on the New Zealand Goodwill, also modelled as being financed at 3.6% is is: 0.036 x $3.818m = $0.137m

    EBITDA (adjusted for Goodwill Holding Cost) / Total Operating Revenue = ($66.100m - $0.137m ) / $308.400m = 21.4%

    The cost of capital for RBD in New Zealand is record as 8.9%. So the 'value accreting margin' in New Zealand for KFC is:

    21.4% - 8.9% = 12.5%

    Note that this is nearly three times the Australian value. This means that each NZ KFC restaurant is generating close to three times the earnings value for RBD compared to their Australian KFC counterpart. The hidden effects of holding all that goodwill should not be underestimated by shareholders! Of course RBD management do not consider this as they are one eyedly pursuing their $1billion dollar revenue goal with little regard to the cost of getting there. There is no doubt that RBD is a good company and potentially a great company. But it does look like there is little control on the cost of expansion, and that is reflected in a new low level of Net Profit margin. For this reason, I don't believe Warren Buffett would be jumping out of his insurance float to invest in RBD today.

    SNOOPY

    discl: I do hold RBD myself, but on the strength of this analysis am not lining up to buy more
    Last edited by Snoopy; 10-07-2020 at 09:24 AM.
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  8. #2628
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    Default ROE for Overseas Venture Returns [FY2019(2) Perspective]

    Quote Originally Posted by Snoopy View Post
    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.
    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!

    SNOOPY
    Last edited by Snoopy; 07-07-2020 at 05:53 PM.
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  9. #2629
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    Default MDRT: FY2015 to FY2019(2)

    Quote Originally Posted by Snoopy View Post
    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
    Bank Term Debt $12.675m $22.550m $46.482m $166.815m $145.853m
    less Cash and Cash Equivalents ($1.575m) ($1.093m) ($70.390m) ($10.410m) ($15.034m)
    equals Net Debt {A} $11.100m $21.457m NM $156.405m $130.819m
    Declared NPAT {B} $23.830m $24.070m $25.595m $35.466m $35.741m
    MDRT {A}/{B} 0.5 yrs 0.9 yrs 0 years 4.4 yrs 3.7 yrs

    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 33.8cps from FY2017 to FY2019 over the two years since. But 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 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.
    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!

    SNOOPY
    Last edited by Snoopy; 08-03-2021 at 04:27 PM.
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

  10. #2630
    On the doghouse
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    Default EBIT/EBITDA Multiple Valuation Data: FY2019(2) Perspective

    Quote Originally Posted by Snoopy View Post
    I suspect that valuing RBD on an historical capitalised dividend valuation basis will not be realistic going forwards. Global Valar has got plans for growth. KFC / Pizza Hut concept owner YUM Brands is committed carrying out a sell down of almost all company owned restaurants, to their global franchisees, including the likes of Restaurant Brands, by the end of the calendar year just finished. (the remaining 2% of company owned restaurants on the books in December 2016 not yet sold would be sold down in due course).

    Nevertheless, we can regard a capitalised dividend valuation as a 'base case' for a valuation. A middle of cycle business case valuation of $5.45, using my rule of thumb, gives a peak of cycle valuation 20% higher. That means $6.45. This is my target value for topping up my residual RBD holding in the future. That may sound far fetched.in today's heady price environment. But remember the cash issue price for the 26th October 2016 was just $5.15. And that was only two and one half years ago.
    The above was written in March 2019. Obviously things have moved on. We can't used 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!

    SNOOPY
    Last edited by Snoopy; 06-01-2022 at 08:10 PM.
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

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