Date : 11/09/2020

Restaurant Brands NZ Ltd

NZE :

RBD

Market Cap : $1.50 Billion

Buy

52 Week Range : $6.47 - $14.13

Share Price : $12.01

RBD looks to have gained much of the levels it lost due to Covid-19. Although it has a strong outlook and we expect demand levels to rebound, we believe the stock levels looks too high to buy at this price.

Company Analysis

 

Restaurant Brands New Zealand Limited (RBD) is an Auckland headquartered firm that operates in the fast food industry. They hold franchises in fast-food giants such as KFC, Pizza Hut, Carl’s JR, and Taco Bell and manages their retail chains in New Zealand, parts of Australia, and the United States. The firm has 286 stores in its portfolio:

  • 100 KFC, NZ
  • 63 KFC, Australia
  • 35 Taco Bell, Hawaii
  • 1 Taco Bell, NZ
  • 2 Taco Bell, Australia
  • 29 Pizza Hut, NZ
  • 38 Pizza Hut, Hawaii
  • 18 Carl’s JR, NZ

RBD has recently entered into an agreement with KFC, USA to acquire 69 stores in California, USA. These 70 stores consist of 58 KFC’s, and 11 Taco Bell, with a head office to manage them. RBD on September 1st announced that the deal has been completed and it has received consent.

RBD is listed under the New Zealand stock exchange and the ASX under the same ticker code ‘RBD’.

The firm has always reported its performance until February every year. However, during the year ended 31st December 2019, RBD changed its balance date to December. We believe this was also a strategy that was used by the firm to reduce the impacts of Covid-19 on the financial statements. However, a half year 2020 report was released, which should give us a good picture of how adversely the firm has been impacted by Covid-19. The store closures due to Covid-19 has significantly impacted the company’s performance and results. RBD reports loss in sales in excess of $40m due to the 5-week closure in NZ.

Covid-19 Impact:

  • All stores in NZ closed between 25th March and 28th April
  • April 29th to May 14th, only drive-thru in NZ
  • No dine-in at any AUS store during 1st quarter of 2020
  • No dine-in for any Hawaii store during 1st quarter of 2020

The number of customers served by RBD’s stores would be a great metric to measure the impact of Covid. However, the company does not report these numbers. Nevertheless, these numbers are in the millions over a 1-year period. RBD has openly admitted to poor performance due to Covid-19 restrictions and has labelled it as “hard to quantify”.

Company Updates

The announcements made by RBD has given us a fairly good picture of how much the firm has been affected in dollar value due to Covid-19

The half-yearly report for year ending December 2020 showed a $59.2m loss from the previous half-year. Net Profits were down $8.6m relative to the previous half-year.


Source: TradingView.com

RBD received a wage subsidy of $22.1m from the NZ government to offset the impact of Covid-19. The firm is also believed to have received a similar grant in the USA for a sum of US$8.1m.

Despite the impact of Covid, RBD is sticking to its aggressive strategy of expansion. It plans to open 60 Taco Bell stores in Australia and NZ over the course of 5 years. This strategy means the firm will require more capital for acquisitions and they have hence taken a decision to focus on growth not pay dividend for FY ending December 2020.

From the share price chart of the year, it can be clearly seen that investor mood has come back to high levels after the Covid19 induced market slump. The stock has recovered and shows very low volatility – indicating and complementing our analysis of RBD being a stable company.

Industry Analysis

The food & beverage sector has been adversely impacted due to Covid-19. Restrictions have impacted stores, supply chain, employees, etc…
The fast food restaurants however have an upper hand over the bigger and dine-in only restaurants since they were already online with the below advantages:

  • Home delivery option
  • Availability of Drive-thru
  • Lower fixed costs
  • Lower variable costs

We fully expect the F&B sector and the Fast-food industry to bounce back stronger in a post Covid19 world. While the industry may not grow at high growth rates, we expect it to continue to grow at 2% annually.

The fast-food industry is associated with high barriers to entry, capital intensity and a concentration of power among big players. The strengths, weaknesses, opportunities, and threats of the industry has been analysed and presented below:

Investment Thesis

We will primarily be analysing the annual report ended December 2019 since that is the latest report the company has filed. The preliminary first half of 2020 report does not contain enough financial data to draw conclusions for our recommendations.

RBD has a significantly high cash position with $33m – a 133% increase from the previous year. This sets the company in a good position to handle the coronavirus affected areas of the business. RBD reported a 11% decrease in total revenues in December 2019. However, their operating costs had decreased as well by 16%, this indicated a positive performance with Earnings before Interest, Tax, Depreciation & Amortization – a 28.79% increase.

The firm has maintained quite a steady net profit margin, with the latest being 4.61%. We forecast its revenues to continue to increase at the same rate due to the strategy it has already laid out.

The firm also has a financially healthy outlook. With assets significantly greater than liabilities in an industry that is highly capital intensive. The capital structure of the firm is another positive with a 39.4% debt capitalisation, and 60.6% equity capitalisation.

The business model in the fast food industry is capital intensive due to the high fixed costs associated with acquiring, maintaining, and operating the restaurants. This is evident as there was almost a 10% increase in operating costs in the latest annual report. However, this resulted in only a 6.53% increase in revenue and just a 1% increase in Net Income over the same period.

The segmented chart of its revenues by region is below. We can see that more than half of its revenues come from New Zealand. While, Australia and Hawaii have equal revenues coming in. NZ and Australia will recover quicker than the rest of the world from Covid-19, and we forecast the demand in the industry to come back relatively quicker than other parts of the world as well. However, the stock looks to have already reacted to the news of the upcoming new restaurants in NZ and the US (which might be one of the last to recover).

Recommendation

RBD is a stock that looks to have recovered from the pre-Covid slump. The firm has a sound capital management strategy and a healthy earnings performance. The long-term health of the firm is a sign of strength as well. Although we believe that the industry as a whole will go from headwind to tailwind as the world recovers from Covid, we recommend investors to “Hold” if they are already exposed to the stock as we continue to monitor closely. The current stock price is NZ$12.01 – which is very close to the 52 week high of NZ$14.13, indicating it might not be the best time to buy as the stock looks to have reacted to all the positive announcements of RBD.

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