Inflection Underway Unnoticed by Market at Restaurant Brands New Zealand
8x Run Rate P/E, imminent catalyst, negative working capital
FundamentalGoob already covers the company very well in detail, so this will be short. My pitch will serve as a journal for myself and an invitation for any feedback/pushback from readers.
$RBD.NZX
3.05 NZD
380mil Market Cap
650 EV ex lease
Key drivers
New Zealand SSS growth (and SSS growth in other geographies)
New Zealand Poultry CPI/ potato prices
Core Thesis:
RBD is a QSR operator. It has various master rights agreements for KFC, Pizza Hut, Taco Bell, and Carl’s Jnr. Geographically, sales are split 46% New Zealand, 22% Australia, 19% Hawaii, and 13% California. In New Zealand, it also sub-franchises 118 Pizza Hut restaurants. After adjusting for non cash impairments, IFRS lease difference, amortization, it trades at 8x 2H23 run rate
RBD got destroyed by inflation, labor shortage1 and interest rate rising but did not hike prices until early 2023. Inflection is near because:
NZ SSS is inflecting last quarter 24Q1
Poultry CPI and potato prices are declining
So we have interest rates bottoming, cogs bottoming, pass thru pricing power just starting to be exercised, labor shortage easing
Secondary:
Operated by PE finaccess capital with 75% ownership since 2019
Fast food menu prices have not declined ever in New Zealand
Negative working capital
Capital expenditure on new store builds and refurbishments: $400 million over the next four to five years
The bad:
“There’s a lot of opportunity in California – it’s a white space for us” - CEO, 2022AR
California is shitting itself but only makes up 8% sales. Strangely management is signaling Cali as the main focus for future expansion.
There are 0 incentive plans for mgmt. Does this PE know what they are doing?
The Cali acquisition was overpriced. Its like 10x 4 Wall EBITDA. The performance afterwards is also disastrous. Does this PE know what they are doing?
Some exposure to NZ consumers
Risk: Pass thru pricing power weaker than expected and compromises volume
2H23 price raises have not compromised sales volumes in NZ according to management.
Valuation:
23H2 runrate: 14*2
amortization(franchisee fees, growth capex)= 10 - tax 3 = 7
impairment - one time gain - tax = 9 - 4.7 - 1.2 = 3
IFRS impact after tax = 12 - 3 = 9
= 47
380/47 = 8x adjusted 2H23 run rate P/E
Catalyst: Next Q results that validates inflection thesis
Disclosure: I am long the Australian listing at 2.95AUD with 10% of my book. Do your own Due Diligence. This is not financial advice. I am not a financial advisor. Consult a financial advisor before investing.
“labour shortages have significantly impacted the hospitality industry in New Zealand. This has disrupted the ability to operate at full trading hours across all stores and channels, particularly during the first quarter of 2023, but has shown improvement during the second quarter.” - 23 interim
Thanks for the report. As you highlighted correctly , chicken and potato prices have come back. Offsetting that, rental/lease rates continue to climb , as well as huge min wage increases in California and to a lesser extent Nz and aust. I think it’s been oversold and will slowly recover after its peak in mid 2021 . The main problem with RBD is free cashflow is minimal .. debt never gets paid down, dividends are now unlikely to be fully imputed due to the level of overseas operations. Have a look at free cashflow levels over a long period … funds always get eaten up by store modernisations or refreshes etc.