RBD - Restaurant Brands

[Snoopy]

Hey Snoopy, just a few more questions.

1. How many more RBD do they need to rennovate?

RBD have signed an agreement with master franchise holder 'YUM brands' which provides for a committed investment by the group of $35m into the KFC store transformation project over a three year period ended 31 August 2008. $25.8m of this amount has already been spent. (source 2008 Interim Report as at 10th September 2007, p17 Note 8, )

RBD have 87 KFC stores. As at the February 28th 2008 balance date, 30 stores have been renovated.

Obviously the $35m RBD have agreed to spend is not going to transform all 87 stores. However, it is my view that the transformation project has been so successful RBD will continue it beyond the $35m commitment previously agreed. But from August 2008, the timing of the transformations will be to RBDs scheduling, not YUM's.

What is the cost per store rennovation?

Around $NZ1m for each KFC store.

Will they need to carry more debt to do the rennovations?

That depends on the profitability of the KFC stores transformed. Will the increase in sales justify financially the capital costs of the renovations and staff retraining? Past experience is no guarantee of future performance. But in the FY2006-2007 annual report on page 10 we read:

"The transformation process continued to go from strength to strength, averaging 20% growth from upgraded stores." (21 transformed stores completed at the time that statement was written.)

Given that nine transformations happened over the 2007-2008 financial year, and debt did not increase, I would have to say that RBD need *not* carry more debt to continue with the renovations.

2. Will they look at selling Pizza Hut? Doesnt make sense to keep it while it continues to lose market share to Dominos. Can RBD afford to rennovate Pizza hut with such a high debt level?

'Pizza Hut' is also franchised from master franchise holder 'YUM'. It is possible, although I have no proof of this, that Pizza Hut and KFC are 'joined at the hip' and that RBD will not be allowed to give up one franchise and still retain the other. I don't think Pizza Hut will become saleable anyway until the store network becomes profitable at EBITDA level.

Pizza Hut are being transformed into a wholly 'delco' chain. That isn't an expensive process. All you need is an oven, a counter and a cash register. The PH transformation is largely complete. But the transformatioon will become complete when the last 'red roof restaurant' is closed as the associated expensive sit down restaurant lease comes to an end.

3. I have noticed that some of the Starbucks coffee places are starting to look tired and the staff services are getting very slack. The services at some Starbucks are so bad they have lost me as a customer. Will they need to rennovate the Starbucks stores?

I know that new director Sue Suckling wants them to install more comfortable chairs into the Starbucks stores. Does that count as a renovation :-P

4. Are they looking to bring in any new businesses?

I think RBD have first refusal on introducing any of the other YUM brand restaurant concepts.
Hopefully they won't introduce more because, quite frankly, I think management are fully stretched looking after the three franchises they have already.

RBD looks cheap to me at these levels, but I have the above concerns that stops me from investing in it.

You are right to be sceptical Doctor. No investment is risk free. I think the latest seasonal stats show restaurant and takeaway sales down, possibly due to budgetry constraints caused by high interest rates and petrol prices. But people are not going to give up their entertainment. Even if it means swapping going out for a meal and on to a movie for eating a pizza at home and watching the Telly! Personally, I don't see RBD suffering if things get tighter - but I could be wrong.

SNOOPY

[winner69]

If we take the total loans and finance leases both current and non-current I get a total minimum debt repayment time of:

($44.108m+$0.624m)/$8.2m = 5.4 years.

.

SNOOPY

I think we have discussed before but over the last few years RBD isn't exactly the cash cow it is made out to be.

Like the last 5 years (to 2007) free cash flow has been only $18.6m (cumulative) and they have paid out $47.1m in dividends (cash). I don't think the situation has changed much in 2008.

The story over the last 5 years is essentially free cash generated of $18.6m and borrow $28.4m to pay out $47.1m id dividends.

I don't really know what capex requirements are for the next few years but I presume they are still quite high. Paying cash dividends in excess of free cash flow isn't really sustainable is it ... so is RBD living in hope (hopefully really confident of) much improved cash flows (mainly from lower capex requirements) so they can pay dividends as well as reduce debt.

So Snoopy based on the last 5 years performance and if the dividend policy changes one could say they will never pay back debt (in theory and thsi staement only made in response to your debt cover calculation above)

Something perverse in me drives me to keep updating a finacial model I started last century and no doubt when I see the 2008 financials I will update them again. One thing though is in spite of what most feel about them they actually consistently make excessive returns over their cost of capital ..... its just unfortunate that the market once thought that they could actually make super excessive returns and valued them accordingly ... it isn't really RBDs fault that the share price appears to be languishing ..... its the punters who pushed the sharepirice over $2 because of their lofty expectations'

[Snoopy]

The red dots mark where fundamental analysts bought, mainly on the basis that the shareprice at that point was well below RBD's theoretical "value". These valuations were progressively reduced, but the market price was always below RBD's calculated "worth", it was always a "bargain" so the buying continued - all the way down. See how TA kept you out of this stock for years, while the downtrend ground inexorably on. See how even this tentative, unconfirmed technical "Buy" signal knocks the socks off each and every entry made by people who calculated that they were buying "value".

This has been a wonderful stock to be out of these last 3 years - regardless of the seductivly high dividend yield.

I have some sympathy with that fundamental analyst Phaedrus. He must be some kind of kindrid spirt.

If I look back at my own purchasing of RBD shares over the time period of your chart, I see that I purchased some RBD shares in July 2005 for $1.60 (as did he). I purchased shares twice in October 2005 at $1.30 and $1.24 (same price and very close to his purchase dates), and in August 2006 at 96c (as did he), in June 2007 at 88c (same price as his purchase around the same time) and in even September 2007 at 87c (just like him). The co-incidences are just amazing! I know this fundamentalist can't *be* me though. Because I purchased some more RBD shares in mid March 2008 at 80c and this guy didn't. I know at least *I* would have got credit from you Phaedrus for buying 'at the trendline break' (at last!) even if this poor sod obviously forewent that opportunity!

There is another difference between what that guy looked like he was doing and what I have been up to. I use a technique called 'value averaging'. That means I have a fixed dollar amount I wish to spend on shares, and I will buy as many shares as that dollar amount gets me. Thus when the share price is high I will buy less shares and when the share price is low I buy more. The result is that when a share price goes up and down (or even all down for the time period of your graph) the average price I will pay per share is much less than than the 'seeing eye average' the brain calculates from estimating the average position of all those red dots.

Anyway Phaedrus you obviously know this fundamentalist well, having that much detail on his transactions. How about sending him a private e-mail asking if he would like to meet me? I would really like to extend my right hand to his right hand in the spirit of friendship. What do you think are the chances of such a 'shaking'?

SNOOPY

[Snoopy]

I think we have discussed before but over the last few years RBD isn't exactly the cash cow it is made out to be.

Like the last 5 years (to 2007) free cash flow has been only $18.6m (cumulative) and they have paid out $47.1m in dividends (cash). I don't think the situation has changed much in 2008.

Factor in the $NZ30m lost (after tax) in Victoria, Australia over the years 2003 to 2008 inclusive and you might identify where our cash cow was leaking its milk. The good news is *that* leak has been plugged.

The story over the last 5 years is essentially free cash generated of $18.6m and borrow $28.4m to pay out $47.1m id dividends.

If RBD hadn't lost that $30m in Australia, they wouldn't have had to borrow the $28.4m....

I don't really know what capex requirements are for the next few years but I presume they are still quite high.

...could be $NZ10m per year...

Paying cash dividends in excess of free cash flow isn't really sustainable is it? ... so is RBD living in hope (hopefully really confident of) much improved cash flows (mainly from lower capex requirements) so they can pay dividends as well as reduce debt.

Capex expenditure isn't bad per se. It is only bad if the capital expenditure does not generate the anticipated cashflows that supported the business case for the capital expenditure in the first place.

So Snoopy based on the last 5 years performance and if the dividend policy changes one could say they will never pay back debt (in theory and this statement only made in response to your debt cover calculation above)

I should have added that I do not *expect* RBD to ever pay back their debt. It would probably be inefficient use of shareholder capital if this was done. The minimum debt repayment time is more a 'measuring stick concept', to show what kind of financial strength the company is in without resorting to the traditional debt to equity ratio straightjacket standard.

One thing though is in spite of what most feel about them they actually consistently make excessive returns over their cost of capital ..... its just unfortunate that the market once thought that they could actually make super excessive returns and valued them accordingly ... it isn't really RBDs fault that the share price appears to be languishing ..... its the punters who pushed the shareprice over $2 because of their lofty expectations'

If the expansion into Australia had succeeded, and RBD had continued to make the kind of ROA that they had traditionally been doing in NZ, then $2 plus would have been cheap. For a while, it would seem the market believed the RBD management dream. It is a pity that the market isn't always right!

SNOOPY

[duncan macgregor]

I am on your side as usual SNOOPY. What about all those RBD shares you used to talk about before that chart?. i seem to remember we used to debate the issue Long time previous to that chart. Tell us about all those dividends that you and BONGO [before he went broke] used to skite about. I never remember you ever selling anything, so obviously you must be a high earner to keep averaging down. Look at what a simple stop loss might have saved you from doing. Macdunk

[Dr_Who]

Thanks for the great posts Snoopy, Phaedrus, Winner and others.

Just one more ques for Snoopy. Do you think RBD will do a cash issue to reduce debt? It seems prudent in this environment to reduce debt. I may look at buying some RBD if the debt level was not so high. High debt is a dirty word in my portfolio, with the exception of VCT which is a utility asset with a monopoly.

[Snoopy]

Just one more ques for Snoopy. Do you think RBD will do a cash issue to reduce debt? It seems prudent in this environment to reduce debt. I may look at buying some RBD if the debt level was not so high. High debt is a dirty word in my portfolio, with the exception of VCT which is a utility asset with a monopoly.

Doctor, the "interest coverage ratio" ( EBIT/(Interest Expenses) ) for RBD for FY2007-2008 as best as I can estimate it was:

($45.1m-$12.8m-($1.2m+$5.5m))/ $3.41m = 7.5

This is traditionally the measure fundamentalists use when assessing how easily a company can meet its debt obligations. I don't use it much myself so I'll leave it to others to comment as to whether this number is 'good' 'bad' or 'indifferent'. Generally the higher the number the better though.

My feeling is that RBD will not have a cash issue as their expansion will very likely be incremental from now on: a million here, a million there. IOW there will be no real need for a large lump of capital. Last year they were certainly under more pressure than now. My feeling is that if they were going to have a decent cash issue, they would have done it 'back then'.

I also think that RBD is unlikely to have a 'small cash issue' because they have suspended - voluntarily - their dividend reinvestment plan. That plan was in effect a way to get more cash into the company 'should it be required'.

You should also take note that KFC, by far RBDs largest division, is in effect a 'quasi monopoly' , even if Pizza Hut and Starbucks are not!

SNOOPY

[Snoopy]

I am on your side as usual SNOOPY. What about all those RBD shares you used to talk about before that chart?. i seem to remember we used to debate the issue Long time previous to that chart. Tell us about all those dividends that you and BONGO [before he went broke] used to skite about.

Bongo may be gone FIM, but he aint broke - so lets have no more of these scurrilous insinuations. When I said my average entry price was $1.23 that covers ALL the RBD shares I own. Not just the half I bought over the time frame of that chart.

And since you asked about dividends, since listing RBD shareholders have received 88.3cps in dividends - more than each current share is valued at on market. Of course you consider dividends to have virtually no value, which is why you are so wrong about the investment prospects of RBD.

I never remember you ever selling anything, so obviously you must be a high earner to keep averaging down. Look at what a simple stop loss might have saved you from doing. Macdunk

I think, more obviously, it shows your memory has become selective. I sold down my holding of SKC, while Telecom gave a decent chunk of capital back to me last year. I also sold out of Carter Holt, the old BIL International, Foreign and Colonial Trust, Deutsche Bank and Rinker over the last two or three years. In addition to that I redeemed a decent sized government bond that I had held for years. The truth is I have sold off heaps of stuff and have been gradually feeding these funds into the NZX as opportunities come up. But unlike you I 'buy low' and 'sell high'. So you won't see me 'selling out at the bottom' which is what you seem fond of exhorting me to do. I guess that just reflects the fact that I am still an investor whereas you are firmly in the 'former investor' category.

SNOOPY

[chippy52]

From my understanding of this matter a figure above 5 is considered a good ratio

[Steve]

Stopped in at the Gore KFC on my way thru on Monday for a travelling snack pack.

While the food was FRESHLY cooked (not often I get so lucky), the service while pleasent (again, not often I get so lucky) was a bit of a shambles - why have only 1 counter operating at 12:30pm on the first monday of the school holidays? The line was almost stretching to the door!

Obviously they were trying to keep a tight control on expenditure...

The biggest negative would have been having to listen to the cook out the back spending 5 minutes moaning to the manager about why he hadn't done what had previously been asked of him. If the guy had simply shut his mouth and got on with cooking, he wouldn't have had anything to moan about.