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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Restaurant Brands NZ</h2>
2Q20 Sales Takeaways
Restaurant Brands (RBD) announced robust 2Q20 sales growth led by another period of strong KFC New Zealand sales. Group sales for the year to date are up +2.7%, slightly behind our prior full year run-rate, with marginally weaker Australian growth than expected as a result of store refurbishment disruption. RBD’s key brands continue to deliver robust sales growth, however, trading at 27x 12-month forward PE we believe significant earnings growth is priced in. We rate RBD UNDERPERFORM.
What’s changed?
<ul>
<li>Earnings:&nbsp;Minor negative revisions, forecast EBITDA down -1.0%/-0.5%/ -0.5% in FY20E/FY21E/FY22E</li>
<li>Target Price: Increased to NZ$9.30 from NZ$8.00 reflecting WACC changes</li>
<li>Rating:&nbsp;UNDERPERFORM</li>
</ul>
Minor negative revisions reflecting a slight miss in Australia; underlying same store sales growth robust
Year to date sales growth of +2.7% lagged our prior full year run rate. Australia drove the slight miss with a mixture of unfavourable FX movements and sales disruption from ongoing store closures. We have made minor revisions to forecasts accordingly. 2Q20 group sales rose +3.5% on the prior year period, with headline growth impacted by the sale of Starbucks in October 2018. Its operating divisions (New Zealand, Australia, and Hawaii) all achieved positive same store sales (SSS) growth in 2Q20, up +5.4%, +5.8%, and +9.6% respectively.
Key divisional take outs
<ul>
<li>KFC NZ — A standout in the period with robust SSS growth trajectory, up +6.1% in 2Q20 (+5.7% year to date). Headline sales growth of +7.9% for the year to date was helped by an additional three store openings in 1Q20, including one new format CBD store in Courtenay Place, Wellington.</li>
<li>Other NZ — Pizza Hut New Zealand SSS fell -4.3% in 2Q20, a slowing negative trend. Positively, Carl’s Jr. posted strong 2Q20 headline sales growth, up +8.3% (SSS +8.2%) with continued momentum following the introduction of UberEats delivery. RBD plans to open its first New Zealand Taco Bell store in November 2019 with a second in early 2020.</li>
<li>KFC Australia — KFC Australia was the key source of drag relative to our prior full year assumptions with headline sales up +4.2%. Ongoing site refurbishments impacted sales with store closures creating disruption. Encouragingly, SSS growth remains strong, up +5.8% in 2Q20 (+5.9% for the year to date).</li>
<li>Hawaii — Both Pizza Hut and Taco Bell reported positive SSS growth. Taco Bell is experiencing particularly good growth with SSS up +14.5% on the back of successful promotions and led by recently refurbished stores.&nbsp;</li>
</ul>
<div class="content-highlight">
Investment View
KFC has been the star performer in recent years and continues to have positive momentum with recent acquisitions looking encouraging. The two recent transformational acquisitions in Australia and Hawaii means RBD is now a materially different business. The combined portfolio offers a material array of growth options, albeit brings additional complexities and higher risk. We rate RBD as UNDERPERFORM with significant growth already priced in.
</div>
Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255

Restaurant Brands NZ
2Q20 Sales Takeaways
Restaurant Brands (RBD) announced robust 2Q20 sales growth led by another period of strong KFC New Zealand sales. Group sales for the year to date are up +2.7%, slightly behind our prior full year run-rate, with marginally weaker Australian growth than expected as a result of store refurbishment disruption. RBD’s key brands continue to deliver robust sales growth, however, trading at 27x 12-month forward PE we believe significant earnings growth is priced in. We rate RBD UNDERPERFORM.
What’s changed?

Earnings:&nbsp;Minor negative revisions, forecast EBITDA down -1.0%/-0.5%/ -0.5% in FY20E/FY21E/FY22E
Target Price: Increased to NZ$9.30 from NZ$8.00 reflecting WACC changes
Rating:&nbsp;UNDERPERFORM

Minor negative revisions reflecting a slight miss in Australia; underlying same store sales growth robust
Year to date sales growth of +2.7% lagged our prior full year run rate. Australia drove the slight miss with a mixture of unfavourable FX movements and sales disruption from ongoing store closures. We have made minor revisions to forecasts accordingly. 2Q20 group sales rose +3.5% on the prior year period, with headline growth impacted by the sale of Starbucks in October 2018. Its operating divisions (New Zealand, Australia, and Hawaii) all achieved positive same store sales (SSS) growth in 2Q20, up +5.4%, +5.8%, and +9.6% respectively.
Key divisional take outs

KFC NZ — A standout in the period with robust SSS growth trajectory, up +6.1% in 2Q20 (+5.7% year to date). Headline sales growth of +7.9% for the year to date was helped by an additional three store openings in 1Q20, including one new format CBD store in Courtenay Place, Wellington.
Other NZ — Pizza Hut New Zealand SSS fell -4.3% in 2Q20, a slowing negative trend. Positively, Carl’s Jr. posted strong 2Q20 headline sales growth, up +8.3% (SSS +8.2%) with continued momentum following the introduction of UberEats delivery. RBD plans to open its first New Zealand Taco Bell store in November 2019 with a second in early 2020.
KFC Australia — KFC Australia was the key source of drag relative to our prior full year assumptions with headline sales up +4.2%. Ongoing site refurbishments impacted sales with store closures creating disruption. Encouragingly, SSS growth remains strong, up +5.8% in 2Q20 (+5.9% for the year to date).
Hawaii — Both Pizza Hut and Taco Bell reported positive SSS growth. Taco Bell is experiencing particularly good growth with SSS up +14.5% on the back of successful promotions and led by recently refurbished stores.&nbsp;


Investment View
KFC has been the star performer in recent years and continues to have positive momentum with recent acquisitions looking encouraging. The two recent transformational acquisitions in Australia and Hawaii means RBD is now a materially different business. The combined portfolio offers a material array of growth options, albeit brings additional complexities and higher risk. We rate RBD as UNDERPERFORM with significant growth already priced in.

Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255

Restaurant Brands NZ: 2Q20 Sales Takeaways