RBD - Restaurant Brands

[Dr_Who]

I am abit concern with the high debt level of RBD and the rising input cost (raw material - food). The fast food market is very competitive and it is hard to pass on those cost.

MD, I have no idea where NZO sp is going mate, hence I never play the options market.

[duncan macgregor]

But presumably nowhere near as much debt as they would have needed to purchase the Victoria outlets, had they gone down that path.
hiawatha
ps The NZO competition is a traders' competition. I don't really consider myself a trader.

More of an INJUN THAN A COWBOY THEN.

[BRICKS]

More of an INJUN THAN A COWBOY THEN.

ENOUGH riddles about debt, Tell us about BATMAN better still talk about RBD constructively..

[Snoopy]

Whats the debt to equity ratio for RBD?

The last published figures are the half year accounts, dated 10th September 2007.

That balance sheet shows total assets of $119.8m, made up of liabilities of $80.6m and shareholders equity of $39.2m.

In the FY2007-2008 results announcement we learn that debt has been reduced by $6.1m on the prior year. Last year total liabilities were listed at $85.1m, so we can assume total company debt is now $79m.

Nontrading charges of $3.4m have been racked up due to store transformation write offs (and include a $1.2m write down of Pizza Hut New Zealand goodwill). This comes straight off shareholders equity. Offsetting that will be the 'retained operational earnings' from the declared profit of $9.5m. From that $9.5m, 6cps or $5.8m has been paid out leaving $3.7m of new equity on the books. So there has been a net increase in equity from last year of something like $3.7m-$3.4m= $0.3m. Working on last years shareholder equity figure, that would indicate that shareholders equity is at balance date:

$32.6m + $0.3m = $32.9m

If I'm right, that means we are looking at a debt ratio of:

$79m/($79m+$32.9m)= 71%

Some may consider that 'high'. But I am much more interested in the company's ability to service the debt, rather than the ratio of the debt per se. The company's ability to pay down debt is better than the bare figures might indicate because:

1/ Customers pay cash for the goods, so there is no large 'customer debt ledger' to worry about like big ticket item retailers.
2/ Annual depreciation charges have risen by $3m over the last five years. But this extra depreciation is not a cash item and represents an underlying cashflow that does not flow through to profits but can nevertheless be used to pay down debt short term 'if required'.

My own spreadsheet predicts an ongoing operational after tax profit of $8.2m. This is less than the declared operating profit of $9.5m largely because RBD management consider a $1.2m write off in Pizza Hut New Zealand as a 'one off item' whereas I consider this goodwill writedown as a normal and recurring item that will have to be written off every year (as it was up until this year under old accounting rules). 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.

That is slightly higher than the less than five years I consider desirable. But it is a big improvement on twelve months ago when the equivalent minimum debt repayment time figure was:

($49.171m+$0.795m)/$5.0m= 10 years

As the Pizza Hut chain rationalisation gather pace and the KFC transformation strategy continues to bear fruit, I would expect a modest rise in underlying profit with retained earnings being used to pay down debt further. Thus with rising profits and lessening debt, I see the risk profile of RBD improving from here on in, and I don't the the company's current debt levels to be of concern.

SNOOPY

[Snoopy]

Snoopy, I would appreciate your updated thoughts on RBD...

Thanks Steve. The market response to the full year result has been muted. I was somewhat surprised given that, on paper, the company has made real progress. However if you read between the lines the result isn't quite as good as the headline figures proclaim.

General and Administration costs have reduced to $11m from $11.1m. Great. But now that the PH Victoria Operation has been sold, that means the administration costs must be allocated around just the New Zealand KFC, PH and Starbucks outlets. Just as an example I estimate the after tax performance of KFC has been reduced by $0.6m annually as an *indirect* result of closing the Victorian PH business.

Debt has been reduced by $6.1m over the year, or around 13%. However, most of the companies debt is financed on a floating interest rate basis. It so happens that nominal interest rates have increased from around 7.6% to 8.6%. That is an amount that neatly wipes out the lower interest rate bill that would normally kick in as overall debt levels reduce.

So the interest bill has not been reduced. However due to the closure of the Victorian operation, the interest expense must be allocated around fewer retail outlets. Over the past two years there has been a previous big jump in overall debt as a result of the KFC concept renewal fees from YUM. Taking KFC as an example again, the interest expense that must be allocated to this business unit has jumped by about $900,000 per year annually.

The same 'problem' of having to allocate expenses around fewer business outlets affects Starbucks. RBD management tell us that EBITDA performance continues to improve. But any real business needs top pay its interest bill and associated depreciation and amortisation of the business concept licence. By my calculations Starbucks in New Zealand lost around $150,000 last year at the 'after tax fully cost allocated operational level', even as EBITDA performance improved by 7% to +$3.9m.

I guess you won't be surprised to learn that by my reckoning Pizza Hut NZ has lost another $6.4m after tax over the FY2007-2008 period after losing a similar amount last year. I am including in that $6.4m figure, the $1.2m written off in goodwill which RBD claims is just a 'one off', an assessment I don't agree with.

The whole RBD business is tied together by the magnificent ongoing performance of KFC. By my calculations that arm of the business made over $14m after tax for FY2007-2008. Compare that $14m with the declared group profit some 25% lower and that gives some indication of what might happen to the RBD share price if they could just stem the losses at Pizza Hut and Starbucks. I think what we are seeing is a good result in that the rot has stopped. But I think it will take a turnaround in the Pizza Hut business, before the share price really turns. Of course from an 'investment perspective' it will be too late if you wait for that as the share price will have already moved. Buy now, stick it in the bottom drawer and dine on the dividends along the way whiel you wait for the recovery. That would be my recommendation for any investor wanting to get into this food business.

SNOOPY

discl: hold RBD

[duncan macgregor]

SNOOPY No worries mate RBD is not your worst clanger over the last three years. It only dropped from a high of $1-70 to 83c which is not to bad if you are in no rush to go broke.
I reckon TUA from $3-00 to 95c is a better jump out the window on the way out bet.
SCT at $2-95 to $1-19 or what about TEL $6-25 down to $3-78. I wont mention SKC you only lost a couple of bucks on that. You are a great teacher SNOOPY keep it up we are all learning heaps from your fundamental approach to investing. Macdunk

[BRICKS]

BRICKS is in RBD at cost price of 83 cents and holding heaps so what may happen let it HAPPEN.. just look at what has happen to Mr Chips being bought out for HEAPS just send me the MONEY..

[Snoopy]

SNOOPY No worries mate RBD is not your worst clanger over the last three years. It only dropped from a high of $1-70 to 83c which is not to bad if you are in no rush to go broke. You are a great teacher SNOOPY keep it up we are all learning heaps from your fundamental approach to investing. Macdunk

'Former Investor Macdunk' (may I call you 'FIM' from now on?), RBD got to $1.70 because of a *takeover offer* in the market. It wasn't me who was making the takeover. It wasn't me who was buying in at $1.70. So as usual with all of your three year old share charts you scavenge from your favourite broker website all I can say about your fabrications of my share investing performance is 'in your dreams'.

For your information I have more than doubled my holding in RBD over the last three years. At the moment my average holding price is $1.23, not including the 27c in dividends per share I have received since 31st March 2005. Most of my loss was due to the unwinding of the Victorian Pizza Hut venture. Sometimes company expansion plans do not go according to plan. Get over it. Just because RBD didn't make a good fist of PH in Victoria does not mean they won't do a good job of revitalising KFC in NZ.

SNOOPY

[Dr_Who]

Hey Snoopy, just a few more questions.

1. How many more RBD do they need to rennovate? What is the cost per store rennovation? Will they need to carry more debt to do the rennovations?

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

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?

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

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

[Phaedrus]

Dr Who,
For the first time in literally years, RBD has broken above its long-term trendline (blue arrow). It is quite possible that you are not the only one with fundamental concerns though, because this Buy signal remains unconfirmed, so far. Notice the dead flat On Balance Volume indicator (circled). There is precious little volume behind this event. Remember that volume confirms the trend. See how the trendline break was caused by RBD simply tracking sideways, rather than heading off Northward. Technically RBD is still in a downtrend, it is still making lower lows and lower highs.
Nevertheless, if you want some RBD, the time to buy just might be approaching - wait a little longer though. There is no hurry - is there?

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.