(RFG) Donut King ++ BB's Coffee

[tommy]

Decided to get out of RFG, sold out my holdings completely (only a 2+ bagger this time... not happy jan!) because of the ongoing credit crunch.

What concerned me is that because of RFG's high gearing, I believe either a capital raising or debt refinancing might be in the cards in the near future.

Previously I had assumed that Australian financial institutions would not be that heavily affected, but I have reconsidered my position: the situation will probably get worse in the coming months when they disclose and write off more bad debt.

Even though I am convinced its profits would be impressive following the takeover of brumbies and michell's, I decided to opt for companies with no debt in the current climate just to make my portfolio exposed to less debt-related risks. It was a hard decision and I would have held on for much much longer it the credit crunch wasn't getting worse by the day.

Now I'm about 40% cash, getting ready to buying cheap stocks, but the problem is I'm not sure whether the market has hit the bottom yet. The XAO chart looks very bearish and small caps are getting punished heavily (a lot of them are getting hammered badly!)

Good luck to holders, I am still a fan of RFG but for the meantime, I will sit in the sidelines...

CHART:

http://bigcharts.marketwatch.com/int...x=54&draw.y=17

[_Michael]

Decided to get out of RFG, sold out my holdings completely (only a 2+ bagger this time... not happy jan!) because of the ongoing credit crunch.

What concerned me is that because of RFG's high gearing, I believe either a capital raising or debt refinancing might be in the cards in the near future.

Previously I had assumed that Australian financial institutions would not be that heavily affected, but I have reconsidered my position: the situation will probably get worse in the coming months when they disclose and write off more bad debt.

Even though I am convinced its profits would be impressive following the takeover of brumbies and michell's, I decided to opt for companies with no debt in the current climate just to make my portfolio exposed to less debt-related risks. It was a hard decision and I would have held on for much much longer it the credit crunch wasn't getting worse by the day.

Now I'm about 40% cash, getting ready to buying cheap stocks, but the problem is I'm not sure whether the market has hit the bottom yet. The XAO chart looks very bearish and small caps are getting punished heavily (a lot of them are getting hammered badly!)

Good luck to holders, I am still a fan of RFG but for the meantime, I will sit in the sidelines...

CHART:

http://bigcharts.marketwatch.com/int...x=54&draw.y=17

Tommy,

Still, 200% in one year is a pretty impressive result!

Agree RFG is on the list of companies holding lots of debt - and being shunned by the market. Guess it stands to reason as all four big banks have increased lending rates even before reserve bank has done anything.

Its gonna be harder and harder for businesses to lend at favorable rates.

While I think the coffee and bread brands are great must say that we're not big fans of St Michels cakes, been there twice and dissapointed both times, but maybe we ordered the wrong stuff?!

[_Michael]

17 January 2008 Significant Increase in First Half Profit Leading Australian retail food brand manager and franchisor Retail Food Group Limited (RFG) today announced that, based on unaudited management accounts, the Company's NPAT, for the
six months ending 31 December 2007 will significantly exceed (by greater than 15&#37 the NPAT
result achieved for the FY2007 corresponding period.

The Company's NPAT increase on the previous corresponding period is directly attributable to
the previously announced acquisitions in the second half of last calendar year, comprising
Brumby's Bakeries and Michel's Patisserie

Contributing to this result has also been a significant increase in total network franchise outlet
revenue due to strong organic new outlet growth and same outlet sales increases across the
Donut King, bb's cafe, Brumby's Bakeries and Michel's Patisserie franchise systems

CEO Tony Alford said that "the Company's business and franchise systems are performing well,
with the first half results consistent with expectations and previous guidance. Of particular note,
41 new outlet commissionings were achieved during the period across the Donut King, Brumby's
Bakeries, Michel's Patisserie and bb's café franchise systems - representing in excess of 50% of
the full year new outlet growth forecast - whilst at the same time completing two significant
acquisitions."

"Based upon the trading and operational performance to date, we maintain a positive full year
outlook for RFG as the Company progresses the physical integration process of the Michel's
Patisserie business and franchise system during the second half of FY2008." Mr Alford said.

Results for the six month period ending 31 December 2007 will be announced to the market in
late February 2008 at which time further commentary will be provided with respect to the
provisional TMGA results for the 1HFY2008 as well as the allocation of earnings between pre and
post acquisition.
As at 17 January 2008, there was a total of 4 franchise systems and 1050 franchised outlets
under RFG's stewardship comprising;
Franchise system Total Outlets Australia New Zealand Donut King 303 303 bb's cafe 69 46 23 Brumby's Bakeries 328 305 23 Michel's Patisserie 350 344 6 System Total 1050 998 52 ENDS. For further information, interviews or images contact:
Matthew Hart, BBS Public Relations, 07 3221 6711 / 0418 799 91

[tommy]

Hi micheal,

NPAT increase of 15%? Yo gotta be kidding me dude, considering their debt-equity ratio, that is not enough under the current climate to garner a higher PE ratio after such a major acquisition. They need to reduce their debt ASAP.

Don't get me wrong, I love RFG's franchise strategy (though i'm not a fan of michell's cakes similar to you) the fact is that being loaded with debt is not a positive contributor to share price under the current climate. When credit was easy peasy, debt-driven expansion was cool, but once there is a credit crunch, debt is nothing but a drag.

Until RFG clarifies this issue, I would stay on da sidelines for the sake of margin of safety...

[Bobbyvee]

Agree with you completely Tommy. I too am on the sidelines until RFG shows they can manage the debt.

[_Michael]

Agree with you completely Tommy. I too am on the sidelines until RFG shows they can manage the debt.

Yeah me too - way to many quality companies supercheap at the moment to look at borderline opps!

[Zephyrus]

How does a 90% increase in NPAT (as per the most recent announcement) sound Tommy?

I don't think a debt/equity ratio of 60% is too high... It also looks like we're now sitting on a PE of around 10, assuming the 2nd half produces a result similar to the first (although I'd imagine it will be more considering there will be a full contribution from Michel's)..

I'm back in at $1.40 after selling out around August (at $1.60).. I'm much more positive about the expansion strategy now, & with the CRF & CMF up & running, it all looks good for RFG (IMO)...

[soulman]

How does a 90% increase in NPAT (as per the most recent announcement) sound Tommy?

I don't think a debt/equity ratio of 60% is too high... It also looks like we're now sitting on a PE of around 10, assuming the 2nd half produces a result similar to the first (although I'd imagine it will be more considering there will be a full contribution from Michel's)..

I'm back in at $1.40 after selling out around August (at $1.60).. I'm much more positive about the expansion strategy now, & with the CRF & CMF up & running, it all looks good for RFG (IMO)...

Just remember that businesses like DK, Michel and Brumbys make most of their dough during the Christmas season. The second half won't be as rosy.

[Rodin]

How does a 90% increase in NPAT (as per the most recent announcement) sound Tommy?

I don't think a debt/equity ratio of 60% is too high... It also looks like we're now sitting on a PE of around 10, assuming the 2nd half produces a result similar to the first (although I'd imagine it will be more considering there will be a full contribution from Michel's)..

I'm back in at $1.40 after selling out around August (at $1.60).. I'm much more positive about the expansion strategy now, & with the CRF & CMF up & running, it all looks good for RFG (IMO)...

Austock are currently forecasting EPS of 17 cents which puts them on a PE of about 8x.

RFG's franchise model generates fairly stable cash flows which allows them to service relatively high levels of debt.

Also, the company has successfully refinanced recently. Their new debt facility has an initial term of 3 years, with 80% hedged at an interest rate of 7%.

[Zephyrus]

Just remember that businesses like DK, Michel and Brumbys make most of their dough during the Christmas season. The second half won't be as rosy.

Are you saying, soulman, that people only eat bread & cakes etc during xmas?.. Nah, I can't agree with that.. And like I said, add 6 months contribution from Michel's to the 2nd half..