restaurant brands - macquarie · investment fundamentals year end 29 feb 2016a 2017e 2018e 2019e...
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Please refer to page 13 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
NEW ZEALAND
RBD NZ Outperform
Price (at 05:23, 13 Dec 2016 GMT) NZ$5.08
Valuation NZ$ 7.23 - DCF (WACC 8.8%, beta 1.2, ERP 7.0%, RFR 3.5%, TGR 2.0%)
12-month target NZ$ 6.50
12-month TSR % +33.0
Volatility Index Low
GICS sector Consumer Services
Market cap NZ$m 624
30-day avg turnover NZ$m 0.6
Number shares on issue m 122.8
Investment fundamentals Year end 29 Feb 2016A 2017E 2018E 2019E
Revenue m 404.1 541.4 745.9 797.9 EBIT m 34.5 48.2 66.9 71.3 Reported profit m 24.1 29.9 44.4 48.2 Adjusted profit m 24.5 32.3 44.4 48.2 Gross cashflow m 42.8 57.6 76.9 82.1 CFPS ¢ 42.8 51.8 62.6 66.8
CFPS growth % 9.5 21.0 20.9 6.7 PGCFPS x 11.9 9.8 8.1 7.6 PGCFPS rel x 1.09 0.95 0.82 0.81 EPS adj ¢ 24.5 29.0 36.2 39.2 EPS adj growth % 9.0 18.2 24.9 8.5 PER adj x 20.7 17.5 14.1 12.9 PER rel x 1.03 0.92 0.82 0.81 Total DPS ¢ 20.5 22.3 25.8 28.0 Total div yield % 4.0 4.4 5.1 5.5 Franking1 % 100 100 100 100 ROA % 24.3 18.2 17.3 18.8 ROE % 33.4 24.2 22.1 22.3 EV/EBITDA x 10.9 9.4 7.0 6.6
Net debt/equity % 15.3 62.9 44.2 31.9
P/BV x 6.7 3.3 3.0 2.8 1 NZ imputation credits are only able to be used by shareholders to offset NZ income tax liability.
RBD NZ vs NZSE50, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, December 2016
(all figures in NZD unless noted)
13 December 2016 Macquarie Securities (NZ) Limited
Restaurant Brands This kiwi’s not chicken – Aloha cobber! Event
Following the lifting of research restrictions following RBD’s acquisition of
100% of Pacific Island Restaurants Inc (PIR), the franchisee of 37 Taco Bell
and 45 Pizza Hut stores in Hawaii, Guam and Saipan, we continue to rate
RBD as an Outperform, attracted by its compelling investment case.
Having previously highlighted RBD’s ability to leverage emerging global fast
food trends, in this report we look in detail at the increasingly international
growth strategy, the rationale behind it and the opportunities ahead.
Impact
We believe that RBD’s expected strong and sustainable organic growth
underpinned by emerging trends like home delivery, mobile technology, and
changing taste and demographic profiles, is enhanced with a deliberate,
scalable international expansion programme that combines RBD’s proven
operational and store transformation expertise with experienced local
management.
We expect these two drivers to underpin strong and sustained EPS and DPS
growth into the future, providing an appealing foil for the inherently defensive
nature of the fast food category.
RBD’s recent Australian acquisition is trading above plan, and provides the
platform for RBD to potentially acquire suitable Yum! stores in CY17.
In a transaction closely mirroring this structure (store base supported by
experienced local management), RBD is expected to settle on the acquisition
of PIR (Hawaii based Pizza Hut and Taco Bell) in late Dec 2016, a transaction
that with status quo operating KPI is modestly EPS-accretive, but offers
upside from the Taco Bell store transformation, potential bolt-on acquisitions
and as a potential launching pad into mainland USA.
We examine the potential from these two acquisitions and look at potential
opportunities.
Earnings and target price revision
Although the transaction is not expected to settle until late December 2016,
we have incorporated the PIR acquisitions into our forecasts. This has
resulted in a modest ~5% uplift in FY18 EPS forecasts (conservative forecasts
reflecting status quo business model and higher capex). Price target lifted
from $6.35 to $6.50 per share.
Price catalyst
12-month price target: NZ$6.50 based on a PER methodology.
Catalyst: Possible Yum! Australia store acquisition, Taco Bell post store
transformation trading.
Action and recommendation
Following the lifting of research restrictions, we continue to rate RBD as an
Outperform, attracted by the potential for strong and sustainable organic
growth complemented by an international expansion acquisition.
Macquarie Wealth Management Restaurant Brands
13 December 2016 2
A Compelling Investment Case
Following the lifting of research restrictions following RBD’s acquisition of 100% of Pacific Island
Restaurants Inc (PIR), the franchisee of 37 Taco Bell and 45 Pizza Hut stores in Hawaii, Guam
and Saipan, we continue to rate RBD as an Outperform, attracted by its compelling investment
case that includes:
An attractive mix of both domestic and international growth initiatives,
Strong cash flow generation, supporting both capex and a sustainable high-yielding dividend
stream (~5%),
A strong balance sheet,
A defensive business model capable of leveraging the positive emerging global industry trends,
A strong proven management team with operating capability and competitive advantage
within specific brands capable of being transferred to other international markets.
We highlighted the emerging global industry trends and RBD’s potential to leverage those positive
trends in a recent note “Growth most fowl - a path to $10”. We remain of the view that leveraging
these trends will underpin attractive organic growth for RBD’s core businesses.
To compliment this forecast organic growth, RBD has aggressively accelerated its international
growth strategy, with additional, (potentially significant), near-term opportunities having been
flagged to the market. In this note we look at the international growth opportunities.
The growth focus - International wins over Domestic
Reaffirming a clear change in both investment and growth strategy over the past 6-12 months,
RBD has signalled that its growth focus lies offshore, having added both an Australian and now a
Hawaiian business to the previously core NZ platform in the past six months.
Fig 1 RBD FY18e EBITDA by country Fig 2 RBF FY18e EBITDA by brand
Source: Company data; Macquarie Research, December 2016 Source: Company data; Macquarie Research, December 2016
RBD was faced with the choice of either adding new brands to its NZ stable, or to leverage its
current brand-specific expertise into new geographies. RBD’s original intent was to focus on NZ
and accordingly it introduced Carl’s Jr via a greenfield growth strategy. While still committed to this
specific growth opportunity, it did highlight to RBD that domestic growth would be constrained by:
the limited availability of “A” grade drive-through fast food sites in NZ (limiting new store
openings),
A lack of scale with the NZ market size limiting growth opportunities (i.e. the introduction of
new brands results in cannibalisation of existing category sales rather than growth in the
category).
Potential limitation of expansion opportunities or operating flexibility due to anti-compete
restrictions with existing franchisors.
Recognition that a domestic growth focus would be unacceptably slow.
NZ61%
Aust16%
Hawaii23%
KFC68%
Pizza Hut10%
Starbucks4%
Carl's jr2%
Taco Bell16%
Macquarie Wealth Management Restaurant Brands
13 December 2016 3
RBD then turned its attention to opportunities internationally. Having therefore decided that their
operating capabilities and competitive advantages within specific brands were transferrable to
other markets and geographies, RBD took its first step acquiring QSR Pty Limited (QSR), the
largest KFC franchisee in New South Wales, for A$82.4m in April 2016. In late October, RBD
announced the intention to acquire 100% of Pacific Island Restaurants Inc (PIR), the franchisee of
37 Taco Bell and 45 Pizza Hut stores in Hawaii, Guam and Saipan for ~$NZ150m.
We expect the trend towards increased corporatisation of fast food franchises to continue.
KFC Australia
While QSR has appealing scale, operating 42 KFC stores in NSW generating sales in excess of
A$100m and store EBITDA of over A$15m, RBD also acquired an established and experienced
management team, having been the recipient of the Yum! Franchisee of the Year award for NSW
in 2015. The business has been run by a group of experienced senior management that will stay
with the business post acquisition.
By investing in both scale and a Head Office platform, RBD has an Australian business model that
provides the capability for not only sustained improvement in the trading of the current stores but
also the operating and management platform for further, potentially significant future, acquisitions
and store expansion.
The strong 1H17 trading performance from the Australian business - with the business trading well
against expectations set at the time of purchase - supported the rationale for the investment
thesis, confirming the suitability of the platform and capability for RBD to proceed with the potential
acquisition of a block of Yum! KFC stores located suitable geographies in early 2017.
As part of the expansion strategy RBD has identified the opportunity for future acquisitions of KFC
stores in the Australian market. While a number have been identified and some initial discussions
held, none have been formally progressed to date. Two new KFC stores have been approved by
the Board for construction the NSW market.
RBD also shared some insight into YUM!’s plans for store ownership in Australia. Following
YUM!’s sale of the Pizza Hut business in Australia, it has signalled an indication to sell the majority
of its company-owned stores in Australia over the next 3-12 months, while retaining some stores
to enable market testing and management training. Under this model, RBD is hopeful that it will be
in a position to acquire YUM!’s company-owned stores in NSW.
A Yum! Sell down What if?
Currently there are ~620 KFC stores in Australia, with Yum! Owning ~160 stores (with ~80 in NSW
and 20 in Victoria). The largest corporate franchisee is CKF with 171 stores in WA, NT and
Queensland.
Collectively Yum!, CKF and RBD own ~373 stores, representing 60% of the total Australian KFC
sites.
Macquarie Wealth Management Restaurant Brands
13 December 2016 4
Fig 3 KFC stores by State
Source: RBD Presentation; Yum! May 2016
The following table summarises the corporate ownership.
Fig 4 Corporate KFC store ownership
Estimated store numbers
Western Australia 40 Northern Territory 5 Queensland 130 NSW 200 ACT 15 Victoria 170 South Australia 50 Tasmania 15 Total KFC stores 625 Yum! Owned stores 160 CKF owned stores 171 RBD owned stores 42 Total Corporate owned stores 373 % Total KFC Stores 60%
Source: Company data, Dec 2016
And what might RBD need to pay?
Fig 5 Possible YUM! store acquisition price
YUM! NSW stores
Assumed stores for sales 60 Average revenue/store (NZ$m) 2.6 Implied revenue 156 Assumed margin 16.5% Implied EBITDA 25.7 Assumed acquisition EBITDA multiple 6x 7x 8x Implied acquisition cost (NZ$m) 154.4 180.2 205.9
Source: Macquarie Research, December 2016
Total 130 CKF 130
Total 5 CKF 5
Total 50 Yum! 40
Total 200 RBD 42 Yum! 80
Total 150 Yum! 20
ACT 10
Total 44 CKF 38 Yum! 6
Total 15 Yum! 13
Macquarie Wealth Management Restaurant Brands
13 December 2016 5
We estimate that if RBD were to debt-fund the acquisition, net debt/EBITDA would increase from a
forecast post-Hawaii acquisition level of ~1.4x to ~2.4x, pressing close to balance sheet limits.
RBD could look to fund the acquisition via a similar structure to the Hawaiian acquisition (a
combination of debt and equity).
We expect any Yum! divestment to be structured according to existing franchisee areas of focus
providing RBD with a clear advantage as the majority of the Yum! stores are located in RBD’s
area of focus – NSW.
RBD has also identified other potential corporate scale acquisition targets in the region, and we
would expect RBD to progress those opportunities in accordance with the vendor’s timetable. We
see the potential for a store base in Australia >250.
The acquisitions will provide operating scale leveraging the existing investment, while RBD’s
operating capability is expected to underpin sustained organic growth.
Aloha Hawaii
RBD announced that it had agreed to acquire 100% of Pacific Island Restaurants Inc (PIR), the
franchisee of 37 Taco bell and 45 Pizza Hut stores in Hawaii, Guam and Saipan.
The transaction is subject to approval from the franchisor Yum! Brands Inc and other conditions
that are customary for a transaction of this nature. RBD has received an approval in principle for
the transaction from Yum!
RBD expects that the transaction will settle by the end of December 2016, although the actual
settlement date will depend on when the agreement becomes unconditional.
The purchase price is US$105m (~NZ$150m), which represents an acquisition multiple of 7.6x
PIR lagging 12-month EBITDA to September 2016.
Fig 6 Acquisition metrics
Acquisition Metrics
Purchase Price ($USm) 105 Purchase Price (NZ$m) 150 Assumed USD/NZD 0.7 LTM EBITDA ($USm) 13.8 EV / pro forma LTM EBITDA (x) 7.6
Source: Company data, October 2016
At the time of the acquisition announcement, RBD suggested that the acquisition would be
approximately 6% EPS-accretive (excluding non-trading items) on the increased RBD share capital.
Fig 7 Combination Analysis and EPS Accretion
(NZ$m)
RBD Group (MAT 12 months to
September 2016) PIR Consolidated % increase
Revenue ($m) 507 173 680 34% EBITDA ($m) 69 20 89 29% NPAT (excluding non-trading) – ($m) 29 8 37 28% Shares on issue (m) 102.9 20 122.9 19% EPS - cps 29 30.2 6% Net debt ($m) 67 60 127 Net debt / EBITDA (x) 1.0 x 3.0x 1.4x
Source: Company Data, December 2016
The transaction will be funded through a mixture of US$-denominated debt and a new NZ$ equity-
raising.
The analysis above assumes that the transaction is financed with US$42m of new debt at an
interest rate of 2.6% and a NZ$94m pro-rata entitlement offer.
With US$42m of new debt post settlement, RBD will have 1.4x consolidated net debt/EBITDA.
We expect the acquisition to settle in late December 2016, making a two-month contribution to the
FY17 year.
Macquarie Wealth Management Restaurant Brands
13 December 2016 6
Strategy behind acquisition
While Hawaii initially appears to be a random geography for RBD to expand into, its market
characteristics have a certain similarity to NZ’s. The business being acquired is similar to the
recent Australian QSR acquisition (in that it has an experienced management team staying with
the business and a proven operating platform), offers scope for RBD to add value by leveraging its
expertise in store transformation, and is a platform for both bolt-on acquisitions in Hawaii and a
potential launching pad into mainland USA.
PIR was established in 1971 and is the sole Taco Bell and Pizza Hut franchisee in Hawaii, Guam
and Saipan, with dominant market share positions.
The acquisition also provides further diversification both geographically and by brand.
The acquisition provides RBD with the opportunity to obtain a proven operating platform in the
market, from which to enhance operating performance (particularly in Taco Bell through a store
refurbishment programme), potentially add additional brands (KFC) and offers the potential to
ultimately expand to West Coast USA.
In addition it offers the opportunity to gain first-hand experience with the Taco Bell brand and to
evaluate its suitability for either/both the Australian and NZ markets.
Taco Bell
Taco Bell is the one brand in the Yum! stable that RBD does not currently operate. PIR own and
operate 30 stores in Hawaii and 7 in Guam.
The Taco Bell brand has a strong local following (the business is supported by domestic demand
rather than tourists), but is ripe for store refreshment.
RBD likens the opportunity to that facing KFC about 10 years ago prior to its store refurbishment
programme, and assuming RBD is able to leverage its operating experience in this area acquired
over the last decade, is hopeful of a same store sales growth improvement not dissimilar to the
KFC NZ experience.
A full store refurbishment would cost ~US$1.0m per store, but (as with KFC) the level of store
transformation will be store-specific, with a range expected to be $400k-$1.5m. We expect RBD to
target about six store refurbishments per year, with the first store transformation expected to be
completed in mid-December (before settlement). This would see the store transformation
programme completed within five years.
We understand that RBD has entered into a contractual ten-year reinvestment plan with Yum!
totalling ~US$14m across the two brands (Pizza Hut ~$US5.3m and Taco Bell ~$US 8.7m)
indexed to US$25 over the 10-year period.
Store level operating metrics
The following table summarises the Taco bell operating metrics (as at last actual).
Fig 8 Taco Bell operating metrics (last actual balance date) - NZ$m
NZ$m Taco Bell
No Stores (last 12 months) 38 Revenue per store 2.5 Forecast revenue 95 Store EBITDA 0.481 Forecast EBITDA 18.3 Implied EBITDA margin 19.2%
Source: Macquarie Research, December 2016
The Taco bell business contributed 70% of PIR’s CY15 store level EBITDA (US$12.8m) and is the
leading Mexican QSR in the local market, with key competitors being McDonald’s, Burger King,
Jack in the Box, Wendy’s, Zippy’s and Taco Del Mar.
The Taco Bell store format covers drive-through, dine in and takeaway. The relatively high store
level operating margin of ~19% in part reflects the all-day menu that includes breakfast and late-
night options.
Macquarie Wealth Management Restaurant Brands
13 December 2016 7
The store network in Hawaii is primarily in local trade areas and currently has limited exposure to
the tourist market. In Guam, the store base services the local population and the military based in
Guam, with potential upside as a consequence of a planned proposal to relocate US forces from
Okinawa to Guam.
The U.S. and Japanese government’s plan to transfer around 4,000 of the 19,000 Marines
stationed on the island prefecture to Guam based on a bilateral agreement, with Japan
shouldering up to $2.8 billion of the $8.6 billion cost estimated for the planned move.
Japan and the U.S. agreed to transfer Marines from Okinawa to Guam and relocate the airfield as
part of the U.S. plan to realign military forces in the Asia-Pacific area and bilateral bids to help
Okinawa, which already hosts the bulk of U.S. military facilities in Japan.
PIR had recently agreed to a 10-year investment programme with Yum! For Taco Bell (and is in
advanced discussions for Pizza Hut). RBD will honour these investment programmes that are
expected to be funded out of operating cash flow and the PIR debt facility. We estimate the Taco
Bell investment capex commitment over the 10 years to be ~US$9m.
While new store opportunities have been identified, the near/medium-term upside is expected to
come from the store transformation programme. RBD believe they could potentially offer the
same upside as the NZ KFC store transformation programme (transformed store same store sales
growth of ~20%) and deliver an attractive return on capital.
In NZ, RBD was able to achieve sustainable sales growth and an uplift in profitability across its
whole store portfolio from its refresh programme. In light of this, should early results from the
refresh programme deliver the expected trading results, RBD could realistically spend in excess of
the investment programme and accelerate the programme.
Fig 9 KFC NZ same store sales and EBITDA margin trend underpinned by store transformation
Source: Company data, Macquarie Research, December 2016
The strong sales growth underpinned significant operating leverage, with KFC NZ EBITDA margin
expansion of 300bp from FY07-FY10 (black line in chart above).
Our current modelling only assumes a continuation of the prevailing same store sales rate (~5%)
and flat margins of 19.5%.
Pizza Hut
RBD will acquire 45 Pizza Hut stores: 38 in Hawaii, six in Guam and one in Saipan. The business
contributed store-level EBITDA of US$5.5m in CY15 ~30% of PIR total store level EBITDA. Pizza
Hut has the usual competitors: Domino’s (14 stores), Papa John’s (14 stores) and Little Caesars
(11 stores), but with 43% market share is more than double its nearest competitor (Domino’s -21%).
Of the 45 Pizza Hut stores, 13 are Red Roof stores and the remaining 32 are Delco or Food Court
stores. A store upgrade plan commenced in 2015, with the majority of stores still to be upgraded.
The store level EBITDA has been relatively stable at ~10%.
15.0%
16.0%
17.0%
18.0%
19.0%
20.0%
21.0%
22.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
% growth
Macquarie Wealth Management Restaurant Brands
13 December 2016 8
Fig 10 Pizza Hut Hawaii/Guam operating metrics
NZ$m Pizza Hut
No Stores (last 12 months) 44 Revenue per store 1.7 Forecast revenue 74.8 Store EBITDA 0.179 Forecast EBITDA 7.9 Implied EBITDA margin 10.5%
Source: Macquarie Research, December 2016
The Financial Impact
Post transaction we forecast FY17 net debt of ~$120m, slightly below the $127m used in the
proforma analysis provided at the time the acquisition was announced. With only a two-month
contribution from the PIR acquisition incorporated into FY17 forecast, net debt /EBITDA is forecast
to peak at 1.6x in FY17 reducing to ~1.1x in FY18 (reflecting a full year contribution from PIR).
Despite the PIR transaction not yet settling, we have incorporated the acquisition into our formal
forecasts. This has resulted in a modest lift to FY17 (reflecting a two-month contribution) and a
4.5% lift in forecast FY18 EPS.
Forecasting depreciation and amortisation is challenging at this stage as RBD is required to
revalue the assets and intangibles acquired in the transaction. This will result in increased fair
value depreciation. As a consequence we currently assume an additional ~$6m increase in
depreciation from Australia on an annualized basis and ~$5m from Hawaii on an annualised basis.
Collectively we forecast FY18 depreciation of ~$30m and amortisation of ~$4m.
Again we note that the value of the transaction is not in providing an immediate EPS uplift,
although we expect the Taco Bell store refurbishment programme to drive strong sales and profit
growth, but in providing a stable platform to support the current business and from which to
leverage additional organic and bolt on growth.
We see upside to medium-term forecasts, particularly for Taco Bell underpinned by potential sales
and margin uplift from the store refresh programme.
Fig 11 RBD FY18 post acquisition forecast
NZ$m FY18 starting FY18 acquisition FY18 new
Revenue 562.1 183.8 745.9 Store EBITDA KFC -NZ 64.1 64.1 PH-NZ 4.4 4.4 Starbucks -NZ 4.6 4.6 Carl's Jr - NZ 3 3.0 KFC - Aust 20.1 20.1 Taco Bell - Hawaii 19.8 19.8 PH- Hawaii 8.6 8.6 Other 0.0 Total Unit contribution 96.3 28.5 124.8 G&A costs 17.4 8.0 25.4 % sales 3.1% 4.4% 3.4% EBITDA 78.9 20.5 99.4 Depreciation/Amortisation 26.8 5.7 32.5 EBIT 52.1 14.7 66.9 Net Interest 2.7 1.6 4.3 Profit before tax 49.4 13.2 62.6 Tax 13.8 4.3 18.1 tax rate 27.8% 33.0% 28.9% NPAT 35.7 8.8 44.5 Shares 102.9 122.8 EPS (cps) 34.66 36.23
Source: Macquarie Research, December 2016
Macquarie Wealth Management Restaurant Brands
13 December 2016 9
Future opportunities
We see near-term and medium-term acquisition opportunities for RBD to build on the increasingly
global operating platform that has been created in CY16 with major acquisitions in Australia and
Hawaii and surrounds.
While individual markets have certain local idiosyncrasies, we believe that RBD’s pure operating
capability of a brand is transportable across geographic boundaries. RBD has recognised the
value in investing in proven, capable local management teams in new geographies and is backing
its own operating and property expertise to add value.
Leveraging the Australian platform
In the near term (~6-12 months) we believe that RBD will have the opportunity to acquire selected
Yum! owned stores in Australia (discussed earlier). In the medium term we see a clear path to
RBD owning/controlling ~ 200 stores in Australia, via a combination of corporate scale
acquisitions, smaller scale acquisitions and new store openings.
This increased scale, launches from a sunk cost platform and offers the potential for significant
operating leverage.
Leveraging Hawaii…..into mainland USA?
In the near term, RBD will focus on the store transformation programme for Taco Bell to drive
revenue and profit growth above that forecast. However, as with Australia, having invested in a
scalable platform, we would expect RBD to aggressively pursue bolt-on acquisitions. The most
obvious target would be to add the KFC brand to the stable.
The KFC franchise in Hawaii is currently assigned to Kazi Foods Corporation of Hawaii (which
also owns the Burger King franchise).
In addition to bolt-on opportunities in Hawaii and surrounding areas, we believe that RBD will use
the Hawaiian businesses to gain an initial exposure to a US market and to evaluate and refine its
interest in pursuing future opportunities in mainland USA.
RBD Valuation and price target
We continue to have an Outperform recommendation on RBD.
Having previously highlighted RBD’s ability to leverage emerging global fast food trends, in this
report we look in detail at the international growth strategy, the rationale behind it and the
opportunities ahead.
A combination of expected strong and sustainable organic growth underpinned by emerging
trends like home delivery, mobile technology, and changing taste and demographic profiles, is
enhanced with a deliberate international expansion programme that combines RBD’s proven
operational and store transformation expertise and experienced local management.
We expect these two drivers to underpin strong and sustained EPS and DPS growth into the
future, providing an appealing foil for the inherently defensive nature of the fast food category.
We believe that our current forecasts are relatively conservative, not factoring any acquisitions
(barring those already announced), taking a cautious view on the upside from Taco Bell store
transformation, and on same store sales growth upside from an emerging snack food category
and home delivery.
On a DCF basis we value RBD at $7.23, supported by a solid and sustainable earnings profile.
Our 12-month price target stands at $6.50, supported by a targeted FY18 PE multiple of 18.0x,
and a PEG multiple still below 1.0x.
The next strategic acquisition will provide the next step change in the share price re-rating.
Fig 12 RBD forecasts
FY16 FY17e FY18e FY19e CAGR
NPAT ($m) 24.2 32.3 44.4 48.2 26% EPS excluding non-trading (cps) 24.7 29.4 36.2 39.2 16% DPS (cps) 21.0 22.5 25.8 28.0 10% Payout ratio 84.9% 76.6% 71.4% 71.2%
Source: Company data, Macquarie Research, December 2016
Macquarie Wealth Management Restaurant Brands
13 December 2016 10
RBD continues to offer a compelling blend of sustainable multi-platform growth, defensiveness,
yield, balance sheet strength, operating flexibility and management capability, all of which, in
combination with our valuation, underpin an Outperform recommendation.
Relative to both listed peers and the broader NZ market, RBD’s superior EPS growth outlook and
appealing business characteristics appear undervalued, in our view.
Fig 13 RBD relative valuation
PE (x) 3 yr EPS growth PEG (x) Dividend yield
Share price FY17e FY18e FY17e FY18e FY17e FY18e
Dominos Australia $65.14 46.8 36.1 30% 1.6 1.2 1.5% 2.0% Collins Foods (Bloomberg consensus) $6.35 16.8 15.3 13.5% 1.3 1.2 2.7% 3.0% NZ market 20.0 19.0 6.3% 3.2 3.0 4.4% 4.6% RBD $5.14 17.5 14.2 25.5% 0.8 0.6 4.4% 5.0% RBD $6.50 22.2 18.0 25.5% 0.9 0.7 4.0% 4.3%
Source: Macquarie Research, December 2016
Stock mentioned in this report:
Domino's Pizza Enterprises (DMP AU, A$66.41, Outperform, TP: A$75.00, Elijah Mayr)
Macquarie Wealth Management Restaurant Brands
13 December 2016 11
Source: Company data, Macquarie Research December 2016
Restaurant BrandsSummary
Profit & Loss FY16 FY17e FY18e FY19e Valuation Ratios FY16 FY17e FY18e FY19e
Revenue 404.2 542.1 745.9 797.9 Share Price 5.14
EBITDA 52.8 73.6 99.4 105.2 No. shares (m) 97.8 122.8 122.8 122.8
Depreciation & Amortisation 18.3 25.4 32.5 33.9 Market Capitalisation ($m) 502.7 631.4 631.4 631.4
EBIT 34.5 48.2 66.9 71.3 Net Debt ($m) 11.6 120.3 93.4 70.3
Non Trading items -0.5 -2.4 0.0 0.0 EV ($m) 514.3 751.8 724.8 701.8
Net Interest 1.0 3.3 4.3 3.4 EV/EBITDA (x) 9.7 10.2 7.3 6.7
Tax 9.0 12.7 18.1 19.7 PE (adjusted) - x 20.8 17.5 14.2 13.1
Reported NPAT 24.1 29.9 44.4 48.2 Price / NTA (x) 9.1 24.0 12.7 10.0
24.1 29.9 44.4 48.2 Free cash flow yield (%) 4.7% 5.2% 9.1% 8.9%
Adjusted NPAT 24.2 32.3 44.4 48.2 Net dividend yield (%) 4.1% 4.4% 5.0% 5.4%
Gross dividend yield (%) 5.7% 6.1% 7.0% 7.6%
Adjusted EPS (cps) 24.7 29.4 36.2 39.2 Imputation (%) 100% 100% 100% 100%
Dividend (cps) 21.0 22.5 25.8 28.0 Payout ratio (%) 85% 77% 71% 71%
Growth rates FY16 FY17e FY18e FY19e Capital Structure FY16 FY17e FY18e FY19e
Revenue (%) 34.1% 37.6% 7.0% EBIT Interest cover (x) 34.8 14.8 15.4 20.8
EBITDA (%) 39.2% 35.1% 5.8% Net debt / EBITDA 0.2 1.6 0.9 0.7
EBIT (%) 39.6% 38.8% 6.6% Net debt / (net debt + SHF) 13.3% 38.6% 30.7% 24.2%
Adjusted NPAT (%) 33.6% 37.4% 8.5%
DPS (%) 7.1% 14.7% 8.3% Key ratios FY16 FY17e FY18e FY19e
ROA (%) 18.2% 17.3% 18.8%
Cash Flow FY16 FY17e FY18e FY19e ROE (%) 24.2% 22.1% 22.3%
EBITDA 52.8 73.6 99.4 105.2 RoFE (%) 36.7% 14.9% 21.2% 23.6%
Working Capital -6.9 -9.7 -2.7 2.9 EBITDA margin (%) 13.1% 13.6% 13.3% 13.2%
Net Interest 1.0 3.2 4.3 3.4 EBIT margin (%) 8.5% 8.9% 9.0% 8.9%
Tax 10.6 14.6 18.1 19.7 Capex/sales 5.2% 4.1% 3.0% 2.9%
Other -3.9 -10.2 0.0 0.0 Capex/depreciation 126 99 78 77
Operating cash flow 44.3 55.2 79.6 79.2
Capex 20.8 22.2 22.1 23.1 Operating Measures FY16 FY17e FY18e FY19e
(Acquisitions)/divestments 5.5 -212.4 0.0 0.0 Store numbers
Other 0 0 0 0 KFC -NZ 91 92 94 97
Funding available 28.9 -179.4 57.5 56.1 PH-NZ 39 34 29 25
Dividends paid 19.6 22.3 30.5 33.1 Starbucks -NZ 25 25 25 25
Equity raised 0 94 0 0 Carl's Jr - NZ 18 20 22 24
Change on net debt 9.4 -107.7 27.0 23.0 KFC - Aust 0 42 44 46
Free cash flow (OCF-capex) 23.5 33.1 57.5 56.1 Taco Bell - Hawaii 37 37 37 37
PH- Hawaii 45 45 45 45
Balance Sheet FY16 FY17e FY18e FY19e Total 255 295 296 299
Curent Assets 12.6 18.5 22.9 24.0
Fixed Assets 100.6 197.8 191.5 184.7 Revenue
Intangibles 20.5 165.0 161.5 157.5 KFC -NZ 282.6 292.0 308.8 331.0
Other Assets 6.0 8.4 8.4 8.4 PH-NZ 44.9 41.3 42.3 43.4
Total Funds Employed 139.8 389.7 384.2 374.5 Starbucks -NZ 26.8 27.1 27.9 28.7
Debt 12.7 125.7 98.7 75.7 Carl's Jr - NZ 33.4 36.5 40.0 45.4
Other Liabilities 51.5 72.7 74.3 78.4 KFC - Aust 0.0 97.9 122.0 132.3
Shareholders funds 75.6 191.3 211.2 220.5 Taco Bell - Hawaii 0.0 14.4 101.7 109.6
Total funding sources 139.8 389.7 384.2 374.5 PH- Hawaii 0.0 11.9 82.1 86.4
Other 16.5 21.1 21.1 21.1
Net debt 11.6 120.3 93.4 70.3 Total 404.2 542.1 745.9 797.9
Valuation EBITDA margin
12 month price target KFC -NZ 20.2% 21.1% 20.8% 20.0%
DCF Valuation 7.23$ PH-NZ 10.9% 10.7% 10.5% 10.5%
WACC 8.8% Starbucks -NZ 16.4% 16.5% 16.5% 16.5%
RfR 3.5% Carl's Jr - NZ 1.3% 3.8% 7.5% 10.0%
Terminal growth 2.0% KFC - Aust 0.0% 16.5% 16.5% 16.5%
Taco Bell - Hawaii 0.0% 19.2% 19.5% 19.5%
PH- Hawaii 0.0% 10.3% 10.5% 10.5%
Macquarie Wealth Management Restaurant Brands
13 December 2016 12
Macquarie Quant View
The quant model currently holds a strong positive view on Restaurant
Brands. The strongest style exposure is Profitability, indicating this stock is
efficiently converting investments to earnings; proxied by ratios like ROE or
ROA. The weakest style exposure is Price Momentum, indicating this stock
has had weak medium to long term returns which often persist into the
future.
Displays where the
company’s ranked based on
the fundamental consensus
Price Target and
Macquarie’s Quantitative
Alpha model.
Two rankings: Local market
(Australia & NZ) and Global
sector (Consumer Services)
6/441 Global rank in
Consumer Services
% of BUY recommendations 33% (1/3)
Number of Price Target downgrades 0
Number of Price Target upgrades 0
Macquarie Alpha Model ranking Factors driving the Alpha Model
A list of comparable companies and their Macquarie Alpha model score
(higher is better).
For the comparable firms this chart shows the key underlying styles and their
contribution to the current overall Alpha score.
Macquarie Earnings Sentiment Indicator Drivers of Stock Return
The Macquarie Sentiment Indicator is an enhanced earnings revisions
signal that favours analysts who have more timely and higher conviction
revisions. Current score shown below.
Breakdown of 1 year total return (local currency) into returns from dividends, changes
in forward earnings estimates and the resulting change in earnings multiple.
What drove this Company in the last 5 years How it looks on the Alpha model
Which factor score has had the greatest correlation with the company’s
returns over the last 5 years.
A more granular view of the underlying style scores that drive the alpha (higher is
better) and the percentile rank relative to the sector and market.
Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])
Fu
nd
am
en
tals
Quant
Local market rank Global sector rank
Attractive
0.0
0.8
1.1
1.6
1.8
-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0
Yum! Brands
McDonald's
Domino's Pizza Enterprise…
Collins Foods
Restaurant Brands
-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%
Yum! Brands
McDonald's
Domino's Pizza Enterprise…
Collins Foods
Restaurant Brands
Valuations Growth Profitability Earnings
Momentum
Price
Momentum
Quality
-1.1
0.6
1.0
1.4
0.1
-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0
Yum! Brands
McDonald's
Domino's Pizza Enterprise…
Collins Foods
Restaurant Brands
-60% -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60%
Yum! Brands
McDonald's
Domino's Pizza Enterprise…
Collins Foods
Restaurant Brands
Dividend Return Multiple Return Earnings Outlook 1Yr Total Return
-27%
-21%
-19%
-19%
15%
18%
22%
29%
-30% -20% -10% 0% 10% 20% 30%
⇐ Negatives Positives ⇒
3m Recom. Revisions
Operating Margin FY0
Profit Margin Last Actual…
3M Price Target Revisions…
Momentum 6 Month
Turnover (USD) 20 Day
Working Capital Inc.
Relative Turnover
0 1
Technicals & TradingRisk
LiquidityCapital & Funding
QualityPrice Momentum
Earnings MomentumProfitability
Growth
ValuationAlpha Model Score
0.14 0.69
-0.73 0.85
0.35-0.14
0.66 1.76 0.71
0.46 1.85
0 1
Normalized
Score
0 50 100
Percentile relative
to sector(/441)
0 50 100
Percentile relative
to market(/422)
Macquarie Wealth Management Restaurant Brands
13 December 2016 13
Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return
Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return
Volatility index definition*
This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or
down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only
Recommendations – 12 months Note: Quant recommendations may differ from
Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions – For quarter ending 30 September 2016
AU/NZ Asia RSA USA CA EUR Outperform 47.26% 55.50% 38.46% 45.47% 59.09% 48.21% (for US coverage by MCUSA, 8.20% of stocks followed are investment banking clients)
Neutral 38.01% 29.31% 42.86% 48.77% 37.88% 36.79% (for US coverage by MCUSA, 8.25% of stocks followed are investment banking clients)
Underperform 14.73% 15.19% 18.68% 5.76% 3.03% 15.00% (for US coverage by MCUSA, 8.00% of stocks followed are investment banking clients)
RBD NZ vs NZSE50, & rec history
(all figures in NZD currency unless noted)
Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, December 2016
12-month target price methodology
RBD NZ: NZ$6.50 based on a PER methodology Company-specific disclosures: RBD NZ: MACQUARIE CAPITAL (NEW ZEALAND) LIMITED or one of its affiliates has provided Restaurant Brands New Zealand Ltd with investment advisory services in the past 12 months, for which it received compensation. MACQUARIE CAPITAL (NEW ZEALAND) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Restaurant Brands New Zealand Ltd in the past 12 months, for which it received compensation. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.
Date Stock Code (BBG code) Recommendation Target Price 20-Sep-2016 RBD NZ Outperform NZ$6.35 10-May-2016 RBD NZ Outperform NZ$5.86 16-Apr-2015 RBD NZ Outperform NZ$4.50 03-Mar-2015 RBD NZ Outperform NZ$4.11 23-Oct-2014 RBD NZ Outperform NZ$3.96 09-Apr-2014 RBD NZ Outperform NZ$3.42
Target price risk disclosures: RBD NZ: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.
Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542,
Macquarie Wealth Management Restaurant Brands
13 December 2016 14
AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 008 583 542 (MBL), any MGL subsidiary noted in this research, , is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures © Macquarie Group
This publication was disseminated on 13 December 2016 at 07:43 UTC.