RBD - Restaurant Brands

[Snoopy]

Here follows my 'Snoopshot' on evaluating Restaurant Brands.

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Restaurant Brands is the principal New Zealand licence holder for the following US “quick service restaurant” brands. The first two business concepts are licensed from master franchise holder ‘YUM brands’, a United States based company.

1/ KFC, the fast food chicken chain: 91 stores (there are additionally 6 independently franchised KFC outlets)
2/ Pizza Hut, the delco takeaway pizza chain : 46 stores (plus 42 independently franchised outlets).
3/ Starbucks, a coffee cafe chain, (licensed from master franchise holder the Starbucks Company based in Seattle USA). 26 stores.
4/ Carl’s Junior, a “burger chain” master franchised by CKE Restaurants Inc (USA): 18 stores. Carl’s Junior is very much in a development phase in New Zealand.

Operating licence agreements are generally for a ten-year term A ten-year option on extending the arrangements further is common.

Competition? In the fast food chicken market, KFC have 97 outlets. Second place is so far behind, no-one knows who they are!

In the takeaway Pizza market, Dominos Pizza lead with more than 90 stores. Pizza Hut is a close number 2 with 88 stores. That is still substantially more than the 66 outlets of Hell Pizza. These are the three chains with a national footprint.

The coffee shop chain market is lead by has many national chain players. Number 1, helped by their association with Mitre 10 Mega, is Columbus Coffee (67) with Robert Harris (40 outlets), and Esquires (29) and ‘The Coffee Club’ (28) all ahead of Starbucks (26) in Outlet terms. BBs café (23) and the fast growing Coffee Culture (20 outlets, including 15 in their Christchurch base) are other names to watch. Starbucks is officially now a ‘niche player’, clearly spelt out on p25 of AR2015.

The burger market is lead by McDonalds (187 outlets) , Burger King (80 outlets), Burger Fuel (42 outlets) and Wendy’s Burgers (22 outlets).. Carl’s Juniors 18+ outlets clearly have a difficult growth path ahead.

Restaurant Brands success so far is entirely driven by the KFC chain which makes up 82% of concept EBITDA, on ‘only’ 74% of revenue. Pizza Hut has been barely profitable over years of resizing and changing the ownership structure. Starbucks have closed over 40% of NZ outlets since FY2007. Carl’s Junior are an unproven growth prospect.

Conclusion: Yes for KFC and Pizza Hut. No for Starbucks. The jury is out for Carl’s Junior.

[Snoopy]

I have used the net profit after tax, excluding non-trading items for the purpose of this comparison. Non trading items include those associated with store closures and sales transformation costs and insurance payments. These are omitted because they obscure how the business is performing on the ground.

Net Profit/No.of Shares

2011: $25.1m /97.763m= 25.7cps
2012: $18.4m /97.809m= 18.8cps
2013: $17.7m /97.856m= 18.1cps
2014: $18.9m /97.871m = 19.3cps
2015: $22.5m /97.871m = 23.0cps

Conclusion: No

[Snoopy]

This is the net profit, excluding non-trading items, divided by the end of year shareholders equity.

2011: $25.1m / $58.9m= 42.6%
2012: $18.4m / $59.8m= 30.8%
2013: $17.7m / $60.3m= 29.4%
2014: $18.9m / $64.7m = 29.2%
2015: $22.5m / $71.2m = 31.6%

Conclusion: Yes

[Snoopy]

This is the net profit, excluding non-trading items, divided by the total sales for the year.

2011: $25.1m / $324.4m= 7.74%
2012: $18.4m / $308.2m= 5.97%
2013: $17.7m / $311.9m= 5.68%
2014: $18.9m / $329.3m = 5.74%
2015: $22.5m / $359.5m = 6.26%

The margin has reduced over the five-year period examined. Nevertheless, the ability to recover margin after a market squeeze has been apparent over the last three years. Centralizing the company’s recruitment system and updating point of sale technology over FY2013 were partially behind the subsequent years’ recovery..

Conclusion: Yes

[Snoopy]

Pizza Hut has been turned around with the best “Concept EBITDA” since 2006. Starbucks EBITDA was the best ever in FY2015. Both of these divisions have dragged down the overall company result in previous years. At KFC the store transformation program, begun in FY2005, is 90% completed. However, the fact that all three established divisions are performing in one year does not mean we can assume they will do so in future years. The past earnings trend just isn’t good enough. This means we cannot use the Mary Buffett ‘growth model’ to estimate the future value of this share. I propose we use the average dividend paid, expressed as a dividend yield, to value this share instead.

SNOOPY

Discl: hold RBD, but not because Warren Buffett would approve!

[Snoopy]

Dividends paid in the calendar years below were as follows:

2011:: 7.0c, 10.0c
2012:: 6.5c, 9.5c
2013:: 6.5c, 9.5c
2014:: 6.5c, 10.0c
2015:: 7.5c, 10.0c

The average annual dividend 16.6 cps fully imputed. 16.6c is equivalent to a gross yield of :
16.6c / (1-0.28) = 23.1c.

Current term deposit rates are around 4%. I would want a return two percentage points better than this to allow for the greater income volatility risk of share such as this. So my June 2015 valuation for RBD is:

23.1/ 0.06 = $3.84

Should term deposit interest rates fall to 3.5% my valuation would increase to:

23.1/0.055 = $4.20

With RBD trading at up to $4.40, the company is now overvalued. However, any share can be expected to be overvalued for extended periods. Furthermore, the overvaluation is not great. If the Carl Juniors growth story takes off (i.e. my modelling is too conservative), then RBD may not be overvalued. In the absence of a better retail/food investment, I will continue to hold.

SNOOPY

[RGR367]

Dividends paid in the calendar years below were as follows:
............................

23.1/ 0.06 = $3.84

Should term deposit interest rates fall to 3.5% my valuation would increase to:

23.1/0.055 = $4.20

With RBD trading at up to $4.40, the company is now overvalued. However, any share can be expected to be overvalued for extended periods. Furthermore, the overvaluation is not great. If the Carl Juniors growth story takes off (i.e. my modelling is too conservative), then RBD may not be overvalued. In the absence of a better retail/food investment, I will continue to hold.

SNOOPY

Thanks a lot SNOOPY. A very well presention of your thought about this stock. Really enjoyed it as it was not presented in a charting form. And with basically only a gut feel to guide me on my share buying/selling and/or holding, I feel really vindicated selling most of my shares from $4.00 to $4.50. Now that the dividend has been paid and the price is on a downtrend once again, maybe it's time to start an accummulation phase once more for this stock. But how I missed the times when we were mopping them up at just 56 cents.

disc holding on still to a few bundle just to enjoy the yearly voucher as you Guys are very proud in saying

[LAC]

The average annual dividend 16.6 cps fully imputed. 16.6c is equivalent to a gross yield of :
16.6c / (1-0.28) = 23.1c.


SNOOPY

Hi, I am pretty new to this, can someone please tell me what the (1-0.28) part of this calculation is? Is it the company tax of 28%?

[Harvey Specter]

Hi, I am pretty new to this, can someone please tell me what the (1-0.28) part of this calculation is? Is it the company tax of 28%?

Imputation credits attached (note: not all companies attach IC's). Means you don't suffer double tax - do a search if you need more info as there should be plenty of info on here - or DM me if you have any specific questions.

[Snoopy]

Hi, I am pretty new to this, can someone please tell me what the (1-0.28) part of this calculation is? Is it the company tax of 28%?

Yes. It might more sense if you looked at the calculation the other way around: Calculating the 'net profit' from the before tax profit:

0.28 x 23.1c = 6.5c (the tax paid). As investors, of course, the most important part is what part of the profit is left over for us:

(1-0.28) x 23.1c = 16.6c

SNOOPY