RBD - Restaurant Brands

[winner69]

The Double Down thing should do wonders for the share price

I thought people only camped outside stores for Apple things .....not for a bun ess burger

Any gues as to the sales increase this will create

[winner69]

The Double Down thing should do wonders for the share price

I thought people only camped outside stores for Apple things .....not for a bun ess burger

Any gues as to the sales increase this will create

up 5 cents today ... whats the next invention? A doughless pizza?

[buns]

I left work early to get one as the thought of it was distracting me all day.

Turned up to a huge mob of people all pretty angry as they had run out of double downs (Kent tce wgtn).

Word is, they will be back tomorrow.

[Sauce]

Classic Buns!

I drove past Kent Tce KFC early this morning and there was a long cue outside and tv cameras! I cant imagine anything worse to eat at 9 in the morning.

Lol, KFC must be loving this, what a bizarrely un-PC and differentiated marketing strategy in this day and age of McDs wraps and salads etc

I love it. Talk about embracing your faults and running with them... !

[fungus pudding]

up 5 cents today ... whats the next invention? A doughless pizza?

Yep - without the toppings.

[Te Whetu]

Hi KJ

i previously posted an analysis of RBD, I haven't had time to update it with the latest figures, will post here when I do. The previous analysis is here:
http://gregnz.wordpress.com/2010/12/...brands-part-2/

Essentially it sees little to no growth, a reduction in capital expenditure and an ongoing free-cash-flow of around $21 million, which gives me a stock price of $3.59.
I also think that this is a relatively conservative estimate, with no factoring of improved sales due to the KFC refurbishment program.

something to think about!

cheers
Greg

NOTE:
None of this has much to do with the actual value of RBD, so much its valuation as provided by Greg. Read only if you're interested in commentary on valuations.

NOMINAL WACC OF 7.7%:
This seems too low, would be happy to be directed to the KPMG document which says otherwise but a search on Google for “WACC KPMG 7.7%” resulted in two items by you and no KPMG source...

I had more comments around WACC but removed them. Quick question I’ve got due to your comment around the “safety margin”. Would you buy a stock with zero "safety margin"? If not then I strongly suspect it's not worth what you claim it is and you need a higher WACC.

ERRORS IN VALUATION AND GENERAL COMMENTARY:
As for your valuation I’ve a few points below. Note that for the below I’ve assumed that the WACC is correct.

1. EBITDA in the KFC financials is before G&A. Therefore you are going to need to adjust for this if you want to use EBITDA for anything meaningful. I note that you used EBIT so this should not impact your valuation, just something to be careful of.

2. You have included the non-trading line in your EBIT figure. Within non-trading is a portion associated with refurbishment, including this should be ok if you think RBD might keep having items like this pop up regularly. However of the non-trading item, $396k is an impairment (i.e. non-cash). You should adjust for this. I recommend reading the notes to accounts when valuing a business, in this case it is having a $7.0 million impact on your valuation.

3. Took me a little while to figure what you were doing with the reinvestment + reinvestment rate, finally got it. Not the way I would do things but whatever; I wonder if you understand what you are implying with this, you're basically saying RBD will spend circa $21 million on capex, changes in working capital and tax each year into perpetuity (growing at inflation). I like basing a valuation on FCFF or FCFE but you need to understand all the items you’re putting into it and what it means. If you assume unleavered tax of circa $9.6 million (based on 33% tax rate back in FY2010 and EBIT of $29.2 million) then this would mean capital expenditure of circa $12 million per annum. Not saying this is right or wrong, just suspect this has not been thought through as the 30% has been labelled reinvestment rate but largely needs to cover tax. Possible this is the tax and it's just an incorrect label.

4. Your historical figures for FCFF are wrong. Not sure how you calculated them, but either way wrong. For FY2010 assuming 33% marginal tax rate on interest FCFF seems to be around $25.6 million. I've calculated this from the statement of cash flows. You could argue a small difference based on what to include in FCFF... but even so, your figure of circa $16 million is WAY off.

5. You mention that you capitalised the operating lease. There are often good arguments for this, however I see while you did capitalise it you did not let this change your valuation (which is fine as many would not bother making the adjustment in the first place). If you ever do wish to remove the operating lease for the purpose of your valuation you will need to do more than just capitalise the future payments and add them to debt, you will also need to: 1) add the same amount to assets, 2) remove lease payments from operating expenditure, 3) apportion some of the operating expenditure to interest, 4) apportion some of the operating expenditure to repayments of the debt, and 5) depreciate the asset you created.

6. Looks like you have an error in the capital structure box up the top. This is not flowing through to the valuation.

Hope this helps, also I’m not promising I’ll go over future valuations.

Cheers
Te Whetu

EDIT: Note my commentary was originally a lot harsher, tried to soften it up a bit when read "Part-time stock analyst" and "so simple I probably got it all wrong" around your MHI valuation on your blog. Originally thought you were holding yourself out to be an expert in valuation.

[gregrday]

Hi Te Whetu

Thanks for your comments, and time looking at the valuation, suspect you might be the first person to do so!
So thanks for the effort. Apologies if I come across as an 'expert', I thought I had made it pretty clear that I'm a guy interested in valuations, rather than an expert. I'm really trying this stuff out to have a straw man up for others to critique, and hopefully learn from. But apologies if that was not clear.

NOMINAL WACC OF 7.7%:
This seems too low, would be happy to be directed to the KPMG document which says otherwise but a search on Google for “WACC KPMG 7.7%” resulted in two items by you and no KPMG source...

Ah yes... hmm. Mea culpa here. KPMG... I actually meant PWC. The reference is: http://www.pwc.com/en_NZ/nz/cost-of-...ember-2010.pdf

I had more comments around WACC but removed them. Quick question I’ve got due to your comment around the “safety margin”. Would you buy a stock with zero "safety margin"? If not then I strongly suspect it's not worth what you claim it is and you need a higher WACC.

No, I wouldn't buy a stock with zero safety margin, but I wouldnt use the WACC to encapsulate a safety margin for a specific company either. I'm not an expert, but I'd rather use the difference in the resulting prices to indicate a safety margin.

1. EBITDA in the KFC financials is before G&A. Therefore you are going to need to adjust for this if you want to use EBITDA for anything meaningful. I note that you used EBIT so this should not impact your valuation, just something to be careful of.

Thanks, will make a note.

2. You have included the non-trading line in your EBIT figure. Within non-trading is a portion associated with refurbishment, including this should be ok if you think RBD might keep having items like this pop up regularly. However of the non-trading item, $396k is an impairment (i.e. non-cash). You should adjust for this. I recommend reading the notes to accounts when valuing a business, in this case it is having a $7.0 million impact on your valuation.

Excellent point, thanks! I did forget about the non-trading items, so thanks for the heads-up.

3. Took me a little while to figure what you were doing with the reinvestment + reinvestment rate, finally got it. Not the way I would do things but whatever; I wonder if you understand what you are implying with this, you're basically saying RBD will spend circa $21 million on capex, changes in working capital and tax each year into perpetuity (growing at inflation). I like basing a valuation on FCFF or FCFE but you need to understand all the items you’re putting into it and what it means. If you assume unleavered tax of circa $9.6 million (based on 33% tax rate back in FY2010 and EBIT of $29.2 million) then this would mean capital expenditure of circa $12 million per annum. Not saying this is right or wrong, just suspect this has not been thought through as the 30% has been labelled reinvestment rate but largely needs to cover tax. Possible this is the tax and it's just an incorrect label.

I think I made a mistake here which I think is what you're pointing out. The reinvestment rate was calculated as the terminal growth/av ROC with a bit of adjustment (which might be a bit dangerous given RBDs history). However, the terminal free cash flow to equity figure was based on EBIT, not EBIT(1-t) which it should have been.

I think this is what you were pointing out? Obviously going tax-free makes RBD a lot more valuable! So that brings the terminal value down to around $286 million, which brings the share price target to around <b>$2.90</b>...

4. Your historical figures for FCFF are wrong. Not sure how you calculated them, but either way wrong. For FY2010 assuming 33% marginal tax rate on interest FCFF seems to be around $25.6 million. I've calculated this from the statement of cash flows. You could argue a small difference based on what to include in FCFF... but even so, your figure of circa $16 million is WAY off.

I calculated FCFF as follows (as per Damodarans example):
2010 ebit *(1-taxrate of 30%)+
2010 depn-
2010 cap exp +
2010 change in working capital

Did I screw something up here? I thought I had looked at it pretty closely, but that doesn't guarantee success! Happy to correct, although just looking at it now, it looks about right? - which almost certainly indicates it is wrong… ;-)

5. You mention that you capitalised the operating lease. There are often good arguments for this, however I see while you did capitalise it you did not let this change your valuation (which is fine as many would not bother making the adjustment in the first place). If you ever do wish to remove the operating lease for the purpose of your valuation you will need to do more than just capitalise the future payments and add them to debt, you will also need to: 1) add the same amount to assets, 2) remove lease payments from operating expenditure, 3) apportion some of the operating expenditure to interest, 4) apportion some of the operating expenditure to repayments of the debt, and 5) depreciate the asset you created.

Good points. I was playing with this, first time, and obviously didn't do it properly. Thanks for the clarification, and the education. Which after all was the point of putting up the analysis in the first place!

6. Looks like you have an error in the capital structure box up the top. This is not flowing through to the valuation.

I'll have a look at the underlying spreadsheet and see whats going on.

Hope this helps, also I’m not promising I’ll go over future valuations.

What? Why not? ;-) It would be great if you could comment on the valuations when they come out. I'm super busy at the moment, but I put them up to learn from and maybe help others as well.

EDIT: Note my commentary was originally a lot harsher, tried to soften it up a bit when read "Part-time stock analyst" and "so simple I probably got it all wrong" around your MHI valuation on your blog. Originally thought you were holding yourself out to be an expert in valuation.

[/QUOTE]
Yes, apologies if I came across as an 'expert' (whatever that means in valuation terms!). I think previously I have mentioned that I'm a beginner in valuations, but thought my attempts might reach a 'correct' valuation through crowd-sourcing. And each note like this makes me a little bit better, so after a few years of such feedback, I might be ok!

Thanks again for your comments.

cheers
Greg
ps. will update the valuation when a) 2010 report is out and b) I have some time!

[Te Whetu]

Hi Greg

Yep, it's been a long time since I've followed this forum, your post was one of the first I read. Anyway about WACC:

The reason I asked if you would buy a stock with zero safety margin was to gage how you were approaching the WACC. There are two common ways of looking at WACC and neither is wrong for the purpose of deciding whether to invest or not, (as long as you understand the process you are going through).

Option One: Include within the WACC any margin which would be needed to purchase the asset, this will allow for items such as risk of the cash flows. As such if the value is at all greater than the price then you would buy. Assuming limited funds then you would pick the greater NPV.

Option Two: Use a lower WACC but know that the value you arrive at does not equal your entry price (you need a safety margin). This is an approach which I feel you are using.

There is nothing wrong with the second option when deciding on investment decisions; however care needs to be taken when saying that you have arrived at a company value of “x”. For most people reading that they would see it as “the intrinsic value is x”, which if you need a safety margin may not be correct. Not an issue for your own investing but something to be careful of when sharing your valuation with others. This is also the reason valuers would tend towards the first method.

As for the PWC WACC, I don’t like it (in particular the equity beta). I suspect they have done a regression analysis of RBD to find the beta. The problem with this is where RBD has come from and where they are going... over the last several years they have had very good performance after putting behind them several years of very bad performance. Thus they have not really followed the market (and to be honest small companies rarely follow the market).

However that time of being relatively indifferent to the market is over and I suspect they will be closer to other similar companies’ performance going forward (unless they enter another venture which destroys shareholder, i.e. Aus). I’ll quote their recent investor presentation:

“Despite a solid year, the company remains cautious about its 2012 outcomes. Economic uncertainty remains (GFC “hangover”). Impact of GST change is still working through to consumer spending habits. Impact of petrol price increases is impacting discretionary spend. Some price pressures building on input costs. The 2H of FY2011 saw a tapering of sales growth, especially KFC – this will continue into 1H2012.”

This is not a company which wants a long slow recovery from the GFC, they did ok during the recession, but that’s mainly because they were coming off a low base. I think a more appropriate equity beta is circa 0.9, I’ve come to that figure by comparisons with other internationally listed fast food companies (adjusted for leaverage). Now the companies I looked at were all larger but while that should impact the WACC it should not be too bad for the beta unless the companies are so large they tend to shift the market.

On the other point, I may make comments now and then, but honestly don’t have enough time to respond to every post around valuation... I tend towards longer posts which means responding too much could cost a lot of my time. Plus I’ve no inclination spend all my free time doing something for free when I get paid to do very similar stuff. I do enjoy this, so I will post, but I’m not going to be able to post as much as some of the forum's heros', (you all know who you are).

Oh and as for your FCFF formula, it seems fine (though working capital could be + or -). I was calculating it from the cash flow (which has a slightly different formula), but two estimates should be close. I'll have to look at it some other time as need to head off to dinner.



Cheers
Te Whetu

[Blendy]

From the NZHerald this morning, re Double Down madness:

"A KFC spokeswoman said sales were five times higher than they had expected."

"The limited edition burger, which sold 16,000 in its first three hours, increased staff members' workload 10-fold, a KFC cook said."

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10726314

[Snoopy]

So while you and Phaedrus may yet be proved right, I can't see a single piece of evidence in the market, bar a falling RBD share price (which has turned the corner and is recovering again anyway). Short term the market is a voting machine and share prices will be buffetted. Medium term, I can't see such scaremongering scenarios as gaining any traction. At a PE of 9 the market is already pricing in your scenario of doom, so worst case the RBD share price stays still. IMO the only way to go is up from here.

There was a stock exchange enquiry asking why the share price suddenly dived from the mid $2.70s to around $2.30. The company replied they had no inside information to explain the fall. Previously released profit guidance was reaffirmed. Traders nevertheless saw the whole share price fall as a portent of doom and got out. Snoopy did not sell because there wasn't a shred of fundamental news to support any share price fall at all.

Now just 3 months later the share price has returned to near all time highs. There was no hidden doom. That last RBD share price fall, with hindsight can only be explained as 'trading noise'. Those traders who acted have now been revealed as trading on nothing at all but entirely unsupported sentiment. Here is an example of T/A not being a helpful investing tool, but only a mechanism for incurring unnecessary costs. For those who think they can just ignore fundamentals and use pure T/A techniques it is all a sobering lesson.

The 'weighing machine' trumps the 'voting machine' again, and this time relatively quickly!

SNOOPY