BT1/ STRONG MARKET POSITION (Top 3 in chosen market sector) [perspective 2018]
Quote:
Originally Posted by
Snoopy
Here follows my 'Snoopshot' on evaluating Restaurant Brands.
------
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.
During 2016 'Restaurant Brands' has reinvented itself. What was a 'domestic franchisee' has become a 'multi-brand international restaurant business'. The vision is now:
"To be a leading operator of enduring and innovative Quick Service Restaurant (QSR) Brands in the jurisdictions in which the company operates."
Since this 'change of focus', there has been a push into the Australian and in particular the New South Wales' market. Restaurant Brands now owns more KFC outlets in Sydney/ New South Wales than any other KFC operator (61 stores). Similarly the push into Hawaii, with the acquisition of 'Pacific Island Restaurants', sees them controlling the largest QSR restaurant chain in that state (with 45 Pizza Hut Stores combined with 37 Taco Bell outlets). As part of this transition, the Starbucks franchise of coffee stores within New Zealand has been sold. The KFC chain (No. 1 in the fast food chicken market) and Pizza Hut (no.2 in the Pizza market) remain as part of the stable. Restaurant Brands is now the 'master franchisee' for Pizza Hut in New Zealand, with the provincial and lower volume stores being sold off to local operators. The roll out of the Carls Junior Burger chain seems to have stalled with total chain numbers down to 18. They are not a top three market player, being behind McDonalds (167 outlets), Burger King (83 outlets) and the locally owned Burger Fuel chain (52 outlets), and Wendy's Burgers (21 outlets).
Restaurants Brands must carefully follow the prescription of their master franchise owners for each restaurant concept. However there is some freedom and Restaurant Brands feel they can add particular value in both:
1/ Marketing AND
2/ Facility and supply chain management
Conclusion: Pass Test for New Zealand, Hawaii and New South Wales (with the exception of Carls Junior in the burger market in NZ).
BT2/ INCREASING EARNINGS PER SHARE TREND (one setback allowed) [perspective 2018]
Quote:
Originally Posted by
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
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
2014: $18.863m /97.871m = 19.3cps
2015: $22.523m /97.871m = 23.0cps
2016: $24.207m /102.871m = 23.5cps
2017: $30.567m /122.843m = 24.9cps
2018: $40.361m /123.629m = 32.7cps
Conclusion: Pass Test
BT3/ RETURN ON EQUITY (at least 15% for 5 years) [perspective 2018]
Quote:
Originally Posted by
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
Net Profit excl. non trading / Shareholder Equity EOFY
2014: $18.863m / $64.656m = 29.2%
2015: $22.523m / $71.210m = 31.6%
2016: $24.207m / $75.617m = 32.3%
2017: $30.567m / $192.059m = 15.9%
2018: $40.361m / $201.608m = 20.0%
Conclusion: Pass Test
PS For comparative trend purposes the annualized latest half year ROE is as follows:
HY2019: ($21.853m x2) / $217.075m = 20.1%
BT4/ ability to raise margins at above the rate of inflation [perspective 2018]
Quote:
Originally Posted by
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
This is the net profit, excluding non-trading items, divided by the total sales for the year. Note that in a change from the 2015 perspective I am now including 'other revenue' as part of the representative ongoing revenue of the company. This is because the largest part of other revenue is money received from YUM to act as master franchise holder for Pizza Hut in New Zealand. And this is a revenue stream that will be ongoing
2014: $18.863m / $330.399m = 5.7%
2015: $22.523m / $372.803m = 6.0%
2016: $24.207m / $404.095m = 6.0%
2017: $30.567m / $517.549m = 5.9%
2018: $40.361m / $766.289m = 5.3%
Conclusion: Fail Test
SNOOPY
Buffett Tests Overall Conclusion [perspective 2018]
Quote:
Originally Posted by
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.
Discl: hold RBD, but not because Warren Buffett would approve!
A significant progression has occurred since Restaurant Brands have shifted outlook from becoming a 'domestic franchiser' to an 'international restaurant developer'. The point of failure in the 'Buffett Tests' is now the seemingly ever decreasing net profit margin. To give this some context, I have stacked up the profit margin trend against the company that develops the KFC concept in China, YunChina (YUMC). YUMC is twenty times the size of RBD and operates in a different market. Nevertheless, the underlying mode of operation, developing new outlets for the master franchise holder in the US - YUM brands - is the same. Furthermore I have calculated the Net Profit Margin for the most recent half year reporting period for RBD:
$21.853m / $445.848m = 4.9%
and added that to the trend comparison. Note that I am comparing the RBD year that ends in March with the YUMC year that ends in December. The best overlap is to consider the RBD FY2018 year ending 31st March 2018 with the YUMC year ending 31st December 2017, So this is what I have done for all years
|
FY2014 |
FY2015 |
FY2016 |
FY2017 |
FY2018 |
HY2019 |
Restaurant Brands Net Profit Margin |
5.7% |
6.0% |
6.0% |
5.9% |
5.3% |
4.9% |
YumChina Net Profit Margin |
4.1% |
3.7% |
5.4% |
7.0% |
8.3% |
|
What can explain the two apparently diverging trends? The low profitability of YUMC in FY2013 and FY2014 can be explained by a supplier food handling scandal. In FY2014 that saw a same store sales decline of up to 40% at some KFC outlets. FY2015 was a period spent rebuilding from this. So it is the FY2016, FY2017 and FY2018 net profit margins are reflective of what shareholders might expect without these adverse conditions at YumChina.
By contrast at RBD, FY2017 and FY2018 are the periods where the great overseas expansion strategy was coming into play. In AR2018 p26 and p27, CEO Russel Creedy gives a candid interview. He says that to gain the 'growth' required for the company's strategic vision, to become a billion dollar company in revenue and market capitalization, it was necessary to buy that growth by investing overseas. Yet later in that same interview he admits that:
"Our growth strategy also includes new store builds which incidentally generate the highest return in investment."
Putting the two comments together, it is clear that growth overseas where you are generally buying stores rather that building them is less profitable. Sure Taco Bell in Hawaii has a high EBITDA as a percentage of sales at concept level. But this does not include the extra interest costs incurred in funding the purchase, nor the extra more bloated corporate structure behind the scenes needed to manage it. The RBD growth strategy contrasts very greatly with YumChina who develop all their own stores from scratch.
The ROE decline at RBD mirrors a similar pattern, although there are signs it has stabilized near 20%. This is still a good figure in absolute terms, albeit well down on 30% that was regularly attainable when RBD was an NZ focussed business. Yet so great has been the drop against a background of the NZ side of the business doing well, I think questions need to be asked as to what the ROE is on the overseas side of the business, and just how far above the cost of capital are these overseas business returns?
Taken overall it looks like RBD are on a path of increasing profits, even in eps terms, but decreasing profitability.. Are there shades of Buffett's much derided management phenomenon of the 'institutional imperative' at work here? The naval analogy of the 'institutional imperative' is that our 'captains of industry' would prefer to skipper a battleship, even one with dis-functional weapons than a smaller well armed frigate.
It is possible that RBD will be able to turn their overseas investments around, with more green field KFC projects in New South Wales and a rebuild program in Hawaii that will revamp that states restaurants so that earnings double in that state. However talk that RBD will instead look to acquire more existing restaurants on the West Coast of the United States as their prime growth plan would argue against the positive overseas growth outcome. I think Warren Buffett would be waiting to see if the overseas strategy was not going to degrade the profitability of RBD too much before investing his own money in the RBD story going forwards.
SNOOPY
discl: hold RBD myself, but bought many years ago
Capitalised Dividend Valuation: HY2019 Perspective
Quote:
Originally Posted by
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 is 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.
Dividends paid in the financial years below were as follows:
FY2014:: 9.5c, 6.5c
FY2015:: 10.0c, 7.5c
FY2016:: 11.5c, 8.5c
FY2017:: 12.5c, 9.5c
FY2018:: 13.5c, 10.5c
HY2019: 18.0c
The average annual dividend 20.6 cps fully imputed. 20.6c is equivalent to a gross yield of :
20.6c / (1-0.28) = 30.0c.
Current term deposit rates are around 3.5%. 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 January 2019 valuation for RBD is:
30.0 / 0.055 = $5.45
This valuation is strictly from an 'income' perspective. With the share trading at $7.60 just prior to the 'Global Valar SI' takeover offer, this shows that there was a considerable growth premium built into the share price before the Mexicans came along. At an offer price of $8.90, there is now a huge growth premium built in. A premium I would suggest that can only be satisfied with a sustained push into Pacific rim markets.
SNOOPY
ROE for Overseas Venture Returns [FY2018 Perspective]
Quote:
Originally Posted by
Snoopy
The ROE decline at RBD mirrors a similar pattern, although there are signs it has stabilized near 20%. This is still a good figure in absolute terms, albeit well down on 30% that was regularly attainable when RBD was an NZ focussed business. Yet so great has been the drop against a background of the NZ side of the business doing well, I think questions need to be asked as to what the ROE is on the overseas side of the business, and just how far above the cost of capital are these overseas business returns?
Having posed the above question, I think rather than speculating on what the answer might be, I should 'do the maths' and find out.
From the Buffettology Workbook, p149
"We take the per share amount of earnings retained by a business for a certain period of time then compare it to any increase in per share earnings that occurred during the same period"
In this instance the 'per share earnings retained' has been supplemented by a whole lot of new capital raised with the October 2016 cash issue. So in my judgement it is best to use the change in shareholders equity from the reporting date before the cash issue (EOFY2016) to the end of FY2018. FY2018 was the first full year of operation that included the Hawaiian and most (42) of the Australian KFC acquisition (18 more KFC stores were acquired over FY2018).
|
EOFY2016 |
Change |
EOFY2018 |
Normalised Earnings {A} |
$24.207m |
|
$40.361m |
No. of Shares {B} |
102.871m |
|
123.629m |
eps {A}/{B} |
23.53c |
+9.12c {D} |
32.65c |
Owner Equity {C} |
$75.617m |
|
$210,608m |
Owner Equity per share {C}/{B} |
74c |
+96c {E} |
$1.70 |
Return on Incremental Equity / Share {D}/{E} |
|
+9.5% |
|
The above should not be too much of a surprise. If the overseas operations are now roughly the size of the NZ business, the ROE before overseas acquisitions was 30% and the ROE after overseas acquisitions was 20%, then it would take a figure that low to bring the average ROE down to 20%. I would also argue that not all of that new capital has been in use all of the time (the capital raised one quarter of the way through the study period and gradually deployed over it).
I don't know what the generally accepted value of the cost of capital of RBD is these days. But I would guess that 9.5% 'plus a bit' is still above it. I suppose what this means is that real underlying growth for RBD will be much slower going forwards compared to the recent past.
SNOOPY