So 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 FY2019(2) annual report that covered the ten month period ended 31-12-2019. Generally you would try to value a company on forecast earnings. However, due to Covid-19, these are likely to be significantly disrupted. By using last years results I am effectively 'looking through' the current financial year with the expectation that earnings will recover to FY2019(2) levels by FY2021. It is up to individual investors to judge how realistic that assumption is.
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.
The share price closed at $12.07 on Friday. 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 30% and 49%). Good as this company is, it looks to me to be too highly priced to reflect any type of historical norm fair value. There is also some uncertainty as to whether the latest Californian restaurant chain acquisition will put pressure on the company's banking covenants as well. Consequently I would suggest new investors avoid putting money into RBD at these prices.
SNOOPY
discl: who nevertheless intends holding onto my own residual shareholding!
Last edited by Snoopy; 10-03-2021 at 06:42 PM.
Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7
There is also some uncertainty as to whether the latest Californian restaurant chain acquisition will put pressure on the company's banking covenants as well.
"About 92 percent of North American units (of KFC, Pizza Hut and Taco Bell) are open. The figure increases to 99 percent if express units are not counted, which are mostly under Pizza Hut".
"Trends have improved meaningfully in recent weeks, however, the COVID-19 pandemic continues to impact sales in numerous markets across the world, particularly in markets where we continue to experience significant temporary restaurant closures,” the company said in a filing. “As we have taken steps in response to the pandemic, our primary focus continues to be the safety of everyone who engages with our brands, including our employees, franchisees, and their team members, and customers.”
This would indicate things have got better since the end of April. But with Covid-19 cases blowing out again in California, the prospect of new county wide restaurant lockdowns are already a reality.
Indoor dining rooms must close. Restaurants will only be allowed to serve customers in outdoor areas, or for takeout and delivery.
"The lockdowns will last for at least three weeks. Restaurant dining rooms were only recently allowed to reopen under specific guidelines and a 60% capacity on May 29 after being ordered to close on March 15 to curb the spread of COVID-19."
None of this can be good for RBD's Californian Restaurant chain purchase. I see settlement was expected by March 2020. But at the AGM the Chairman said:
"Whilst the approval process has been delayed with the recent COVID-19 crisis, we are expecting completion early in the second half of this year"
I wonder if this purchase process will be further delayed, or possibly not go ahead at all?.
SNOOPY
Last edited by Snoopy; 12-07-2020 at 11:17 AM.
Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7
Sorry for the dumb question, but can anyone tell me what percentage of the RBD stores restaurant brands also owns the buildings/land? Are they mostly leased?
Sorry for the delay getting an answer to your question Huxley, but no-one has stepped up, so I will give it a go. Here is a quote from an RBD press release dated 21/12/2001 (yes that long ago).
"Restaurant Brands has , since inception, had a policy of investing in store décor , fit out and equipment to sustain and build the in store experiences for our customers. This policy has never included real estate on which the stores are located because the company believes that investing in store assets rather than commercial real estate can make a better return."
"As of September 2001, the company had nearly 200 stores across our three brands (This was when RBD was a pure NZ operation). All Pizza Hut, Starbucks and 30 KFC stores were leased while 57 KFC stores were owned outright."
"In October after a thorough review of several options (included continued retention and disposal by securitization) and taking independent specialist advice, your board approved the sale and leaseback of the currently owned KFC stores. Of the 57 stores owned the company elected to sell 51. The remaining 6 were held for a number of reasons including potential for redevelopment or because of complications in the title that would have impeded the sale and leaseback process."
Tax deductions for depreciation on building structures were removed in the 2011-2012 tax year under the John Key lead national government. As part of the $2.8b support package for business, the Government has reintroduced building depreciation deduction claims for property owners with commercial and industrial properties, at a level of two percent a year, starting in April 2020. I don't see RBD as being a big beneficiary of this change in policy.
SNOOPY
Last edited by Snoopy; 14-07-2020 at 11:34 AM.
Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7
'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
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).
We haven't heard much progress on the Restaurant Brand's deal to buy 70 KFC restaurants in California and I am wondering if it is time to end this trans pacific foray. The article below is mainly about McDonalds. But the final two sentences that mention KFC are telling:
"Back in March, which feels years ago, Starbucks announced on a Sunday (March 15) it stopped all seating, including café and patios, throughout U.S. and Canada restaurants. This as a slew of states began to pause dine-in service in an effort to stem the spread of COVID-19."
"It carries a familiar vibe to what’s happening today. Just that week alone, Chick-fil-A, Shake Shack, Noodles & Company, Inspire Brands, McDonald’s, Wendy’s, Dunkin’, and KFC followed suit, among others."
If I read that correctly, all dining on KFC premises in mainland USA (and that includes California) has stopped. I would think that is very material to RBD's Californian acquisition proposal. If the deal hasn't been called off, I would suggest there are now strong grounds for a renegotiation on price. If RBD can't get a discount on those Californian restaurants, I would suggest their capital is better spent revamping their Hawaiian operation, and perhaps re-energizing their plans to pick up another swag of KFC restaurants in New South Wales.
SNOOPY
Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7
We haven't heard much progress on the Restaurant Brand's deal to buy 70 KFC restaurants in California and I am wondering if it is time to end this trans pacific foray.
All dining on KFC premises in mainland USA (and that includes California) has stopped. I would think that is very material to RBD's Californian acquisition proposal. If the deal hasn't been called off, I would suggest there are now strong grounds for a renegotiation on price. If RBD can't get a discount on those Californian restaurants, I would suggest their capital is better spent revamping their Hawaiian operation, and perhaps re-energizing their plans to pick up another swag of KFC restaurants in New South Wales.
News released today that the Californian deal is going ahead, with no mention of a price renegotiation.
YUM closed down many restaurants during the second quarter of the year., but it looks like the tide has turned:
"Restaurants started reopening in May, and as of June, closures were down to half what they were at their peak. Today, closures have slid to fewer than 2,500 units, meaning Yum is back to 95 percent coverage."
Time will now tell if RBD has overspent to establish its Californian foothold.
SNOOPY
Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7
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.
EBIT/EBITDA Multiple Valuation Calculation: FY2019(2) Perspective
Originally Posted by Snoopy
Reply With Quote
Bookmarks