RBD - Restaurant Brands

[Te Whetu]

It did offer a massive buying opportunity... I've been waiting for my margin account to clear to increase my holding even further but it got approved a little too late. I've given up hope of it falling back again, especially with next quarters sales announcement coming up, which due to the one off gain of the double down will likely be bumper. So might as well post the following:

I really like RBD right now, and luckily was able to more than double my holding during the price weakness.

The reason I really like RBD are for the standard reasons the FA's on this forum harp on about: strong dividend, low debt, full imputations etc... it's a solid company at a very good price.

However the main reason I have increased my holding recently was the comment by management that they would slow their capex spend this year, (10 KFC renovations last financial year vs. 5-6 smaller KFC renovations this year). I estimate they will spend <$15 million capex this year which leaves more than $10 million in additional funds available for either reinvestment or distribution. If they distribute this then it would be another 10 cents distributed per share, taking the dividend payout from 15 cents to 25 cents.

In all likelihood management wont distribute it all, they will look for additional opportunities, pay down debt, and hopefully distribute at least enough to fully use its imputation credits. I'm estimating they will put the dividend up to 20 cents over this year and then possibly a further increase it next year.

There are c.34 stores left for renovation, with a schedule of 5-6 per year all stores will be renovated by FY2017, a total transformation time of around 11 years. This seems reasonable and after this time renovations would likely start again, but that's ok as the re-upgrades would not need to be as drastic. Currently KFC store renovations cost between $1.2 to $2.0 million, so I feel c.$15 million capex is quite reasonable even after allowing for the other franchises etc.

I'd expect the share price will go up if RBD announce a dividend of 20+ cents, as I don't believe this is being fully allowed for by the market.

Assuming I am correct the FCFE this year would be c.$25 even without taking into effect one-off gains from the Double Down and RWC (minor impact?).

Cheers

Te Whetu*

DISC: Over c.55% of my investments are RBD... I'm not investing further at $2.74 news comes out that changes my opinion. But also not selling below $3.10 without news to change my opinion. Even at $3.10 I would not exit I would only reduce to rebalance.

* is hoping for another drop in share price... but not expecting it as the trendies have likely already sold out

EDIT: Sales update just out, KFC sales were only $1,000 off what I'd been forecasting... feeling fairly good about that. Pizza Hut $1.6 million below my expectations. Have never got around to forecasting Starbucks, but looks like an ok result.

[Phaedrus]

The share price suddenly dived from the mid $2.70s to around $2.30. (There was) no information to explain the fall. Traders nevertheless... got out. Snoopy did not sell because there wasn't a shred of fundamental news to support any share price fall at all. Here is an example of TA not being a helpful investing tool, but only a mechanism for incurring unnecessary costs.

Snoopy!!! Behave!!! The facts here prove the exact opposite! Unnessary costs? Selling at around $2.70 and buying back in again at around $2.34 gave a handy profit resulting in more RBD shares held for no extra outlay. Far from "incurring unnessary costs" TA proved to be a very helpful investing tool - the exact opposite of your assertion! Other than TEL, you could hardly have picked a worse share with which to try and demonstrate the superiority of FA over TA. Profits derived from a technical approach to RBD eclipse those made by any fundamental approach.

For those who think they can just ignore fundamentals and use pure TA techniques it is all a sobering lesson.

Huh? Quite the contrary! For those who think they can just ignore prevailing market sentiment and use pure FA techniques to time their entries and exits it is (or ought to be!) a salutory lesson. Snoopy, after 12 years of "investing" in RBD on the basis of its fundamentals, you had made a capital loss. You were buying RBD on its fundamentals while it was in a painfully obvious downtrend. I was very consistent in my disapproval of your averaging down as you "topped up" your RBD holdings at $1.60, $1.30, $1.24 etc etc all the way down. Every so often I would kindly post a chart and gently point out to you that RBD was still in a downtrend. Those buying when the long downtrend did finally reverse made more in a few months than your fundamental approach had made in 12 years! Yet you claim this is a "salutary lesson" for TA users!

Snoopy, you are incorrigible.

[Snoopy]

Snoopy!!! Behave!!! The facts here prove the exact opposite! Unnessary costs? Selling at around $2.70 and buying back in again at around $2.34 gave a handy profit resulting in more RBD shares held for no extra outlay. Far from "incurring unnessary costs" TA proved to be a very helpful investing tool - the exact opposite of your assertion!

The point Phaedrus is not that you made a profit (although I admire your purist zeal in sticking to your philosophy). The point is that you ignored all fundamental data which gave no indication of anything being wrong at RBD, and traded anyway. Any pretense that you are combining FA and TA in some kind of guruish combined system disappeared at that point. You have demonstrated that you are in fact a pure trader, or as pure as it is possible to get in the real world. Not that there is anything wrong with that "per se" if that is the philosophy you follow.

I know what your response will be to this:

You stuck to your system, did the trade, made a profit and nothing much else is relevant.

The problem with this answer Phaedrus, is that despite the stock exchange enquiring as to what might be causing the share price fall, the answer was nothing as is evidenced by the way the share price bounced back. Your trading system had you trading on pure sentiment which IMO one of the most risky thing anyone involved in the share market could ever do. The fact that you came out OK is no more laudatory that the proverbial hedgehog crossing the road and not ending up as a pancake declaring himself an expert "guide hedgehog" for the blind.

SNOOPY

[Snoopy]

For those who think they can just ignore prevailing market sentiment and use pure FA techniques to time their entries and exits it is (or ought to be!) a salutory lesson. Snoopy, after 12 years of "investing" in RBD on the basis of its fundamentals, you had made a capital loss. You were buying RBD on its fundamentals while it was in a painfully obvious downtrend. I was very consistent in my disapproval of your averaging down as you "topped up" your RBD holdings at $1.60, $1.30, $1.24 etc etc all the way down. Every so often I would kindly post a chart and gently point out to you that RBD was still in a downtrend. Those buying when the long downtrend did finally reverse made more in a few months than your fundamental approach had made in 12 years!

But my investment time horizon wasn't 12 years Phaedrus. Roll forward another two years and I was showing a handsome profit way ahead of the market despite 12 years of mediocre performance up to that point. That shows the robustness of the value investment technique.

SNOOPY

[Snoopy]

DISC: Over c.55% of my investments are RBD... I'm not investing further at $2.74 news comes out that changes my opinion. But also not selling below $3.10 without news to change my opinion. Even at $3.10 I would not exit I would only reduce to rebalance.

Starman, you are an even bigger RBD fan than I am! And that takes some doing. So perhaps it is time to unsettle you a bit?

Prior to FY2007, RBD were conscientiously writing off $2.2m in Pizza Hut goodwill per year in accordance with the accounting standards of the time. This was goodwill on the books as a result of the Eagle Boys pizza chain purchase some years earlier. However, under the new IFRS standards, this writing off of goodwill ceased. Goodwill it was deemed should only be written off if the deterioration in future profitability justifies it, not 'as of right'. RBD then stopped writing off Pizza Hut NZ goodwill as any responsible company would under the new accounting standards. So far so good, however...

In FY2007 RBD made a 'one off' PH NZ Goodwill write off of $1.142m.
In FY2008 RBD made a 'one off' PH NZ Goodwill write off of $1.187m.
In FY2009 RBD made a 'one off' PH NZ Goodwill write off of $3.968m.

No further write down in FY2010.

But in FY2011 PH made a 'one off' write off of goodwill of $1m in relation to certain Pizza Hut outlets that they had sold off to owner operators. IOW those outlets sold were on aggregate overvalued on the RBD books. However, management claim that the remaining PH stores are not affected and the PH goodwill that remains on the books is justifed. Do you believe RBD management this time? Call me a cynic, but I don't. IMO RBD PH goodwill is still very much overvalued on the RBD books.

The $7.297m of PH goodwill that has been written off from FY2007 to date is within striking distance of the $11.0m that they would have written off should the old accounting rules still apply. If the PH goodwill was honestly written down to its true value I think that an $11m cumulative write off since FY2007 would be close.

I submit that RBD have been overstating their gross profits by $2.2m, (or $1.5m after tax) every year since FY2007, as a result of the poorly judged treatment of PH NZ goodwill on their books.

SNOOPY

[Snoopy]

S
I submit that RBD have been overstating their gross profits by $2.2m, (or $1.5m after tax) every year since FY2007, as a result of the poorly judged treatment of PH NZ goodwill on their books..

I am not yet finished with the RBD accounts department. Usually RBD highlight their trading performance net of non-trading items. This is fair enough and something I do myself when analyzing a company. The divisional non-trading items consist of such things as "dead rent" commitments as a result of moving out of abandoned stores, and store relocation/refurbishment bills. However, since FY2007 these 'one off costs' aggregated net across the three divisions have been as follows:

FY2007: -$0.975m
FY2008: -$0.993m
FY2009: -$1.176m
FY2010: -$0.162m
FY2011: -$1.149m

That amounts to $4.5m, or nearly $1m per year on average. It appears to me that far from being one off non trading losses, these losses are actually intrinsic to the way RBD does business. IOW we can expect similar losses every year into the future as far as any investor can reasonably foresee. Thus I assert that RBD are quite unwarrantably overstating their trading performance result by $1m per year ($700,000 after tax) by shoving expenses that in reality are intrinsic to trading off to a separate account.

Total over statement of RBD trading profit every year since FY2007 as a result of the above and insufficient goodwill write off discussed previously:

$0.7m + $1.5m = $2.2m after tax.


Something to keep in mind when assessing the performance of RBD!

SNOOPY

PS I should add that none of this makes me want to sell down my own RBD holding. But IMO they are only 'good value' on the market today, not the 'great value' that some others think they are.

[Phaedrus]

The point is that you ignored all fundamental data which gave no indication of anything being wrong at RBD, and sold anyway. Any pretense that you are combining FA and TA in some kind of guruish combined system disappeared at that point. You have demonstrated that you are in fact a pure trader.

Snoopy, I have explained many times how I select the company on fundamentals but base all entries and exits solely on TA. Nothing particularly "guruish" there - and certainly no pretence.

Your trading system had you trading on pure sentiment which IMO one of the most risky thing anyone involved in the share market could ever do.

I disagree. Snoopy, you are not seeing this, but by holding on in the face of obvious negative market sentiment, your purely fundamental system was in fact exposing you to increased risk. When an uptrend ends, the prudent thing is to exit the stock.

The fact that you came out OK is no more laudatory that the proverbial hedgehog crossing the road and not ending up as a pancake declaring himself an expert "guide hedgehog" for the blind.

Came out OK? Snoopy, I came out well ahead. More importantly though, I was the one with an insurance policy. If RBD had continued down even further, I wasn't going with it - you were.



The price of ignoring market sentiment can be very, very high. Take a look at this example of the risk that you run by not selling when a stock shows clear technical weakness. Snoopy and I both held SCT (probably for similar reasons) and it was in a very strong uptrend. We tripled our money over 3 years - but then the uptrend ended. (They they all do, sooner or later). I sold. Snoopy didn't. Over the next 4 years, Snoopy gave all this profit (and more) back to the market as he doggedly followed his F/A strategy of buying "value" and accumulating on weakness. Even now, 7 years later, SCT is still less than half the price it was when the uptrend ended.

Just as TA users can increase their profits by utilising even simple fundamental analysis, so can fundamentalists increase their profits by utilising simple TA.

[Snoopy]

I know how you guys just love charts. So here is my FA chart showing how fiendishly clever I have been in retaining most of my shares in RBD.

The stark thing about those nine years of results is the big step up KFC has taken in FY2010. Some would argue that over the long term and considering history this is unsustainable. However if you look at the after tax results for Pizza Hut you can see that branch of the business is still losing money, around $3m per year by my estimates. Up until last year there was no real way to fix this. Now with the option of offloading restaurants that will never be profitable for a corporate owner to private buyers there is a real possibility that over the next few years these Pizza Hut losses will go. That means even if KFC does slip back to their historic profitability levels, there is every prospect that current levels of group profitability will be stable as far out into the future as we can reasonably see. The other point this chart makes clear is that Starbucks is effectively an irrelevance, and an unnecessary distraction for management. The sooner RBD offload this chain the better IMO.

Here is my 2011 update of the RBD divisional operational chart.

You should note that by my calculations (with the extra amortization of $2.2m thrown in) Pizza Hut lost $4m last year after all expenses were apportioned between the various divisions. That is an improvement from over the $6m aftwer tax loss in FY2010, but still horrific.

It is almost irrelevent to the overall picture but Starbucks I reckon produced its first profit for RBD since 2005, even if it was only $120,000 on nearly $30m in sales, a margin of 0.4%. Compare that to a margin of over 10% for KFC and you can see why this flagship brand is attracting most management attention.

SNOOPY

[Snoopy]

I disagree. Snoopy, you are not seeing this, but by holding on in the face of obvious negative market sentiment, your purely fundamental system was in fact exposing you to increased risk. When an uptrend ends, the prudent thing is to exit the stock.

I was being exposed to volatility that I was prepared to ride out. That is not the same as being exposed to more risk (by my definition of risk).

Came out OK? Snoopy, I came out well ahead. More importantly though, I was the one with an insurance policy. If RBD had continued down even further, I wasn't going with it - you were.

My insurance policy was my background research on the company, a kind of insurance policy that you apparently give no weight to! That was sufficent to know that although RBD might fall with market volatility, it wouldn't fall very far. I backed myself as being smarter than the market over my investment time horizon and in this case I have been proved correct (so far).

SNOOPY

[buns]

Does RBD not manage these units under one company/structure?

How do you attribute items below EBITDA to business units?