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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Restaurant Brands NZ</h2>
3Q20 Sales Takeaways
Restaurant Brands (RBD) continues to deliver consistent quarterly sales growth, with positive same store sales (SSS) across all its operating divisions. KFC New Zealand remains a key highlight for the group with Taco Bell Hawaii also reporting strong sales growth. Whilst the core brands continue to deliver robust sales growth, at ~27x 12-month forward PE we believe significant earnings growth is priced in. We rate RBD UNDERPERFORM
What’s changed?
<ul>
<li>Earnings: Minor revisions</li>
<li>Target Price: NZ$10.30, unchanged</li>
<li>Rating: UNDERPERFORM</li>
</ul>
Strong momentum into year end
RBD reported 3Q20 sales of NZ$192m, another quarter of strong sales growth, up +5.8% on the prior year period. Year-to-date group sales are up +3.6%, largely in line with our revised full year run rate.
<ul>
<li>KFC NZ — Remains a standout performer for the group, maintaining strong SSS growth trajectory, up +5.5% in 3Q20 and +5.6% year to date.</li>
<li>Other NZ — Pizza Hut New Zealand SSS fell -3.2% (-4.1% YTD). Positively, Carl’s Jr. has maintained its momentum with 3Q20 SSS up +15.5% (+11.4% YTD). Carl’s Jr. continues to benefit from the introduction of UberEats; however, this growth will be harder to replicate into FY21E as it cycles the introduction of differentiated pricing on the delivery platform.</li>
<li>KFC Australia — Robust, albeit slower, SSS growth in 3Q20, up +3.9% (+5.3% YTD).</li>
<li>Hawaii — Both Pizza Hut and Taco Bell reported positive SSS growth. Taco Bell is experiencing particularly good growth, with SSS up +13.5%.</li>
</ul>
Taco Bell launch
RBD opened its first Taco Bell store in New Zealand, with a second store scheduled for March 2020. Taco Bell New Zealand reported sales of NZ$0.3m in its first three weeks of trading. We have a cautious view of Taco Bell at this stage given (1) the competitive Mexican quick service restaurant (QSR) space and (2) previous experience with the introduction of Carl’s Jr. RBD has also opened its first Taco Bell Australia, which began trading in 4Q20.
Change in balance date
RBD has changed its balance date to 31 December from 28 February, to better align with majority shareholder Finaccess Group. With little clarity around the impact of seasonal differences we have left our forecasts on a like for like basis at this stage.&nbsp;
<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.&nbsp;
</div>
Guy Hooper guy.hooper@forsythbarr.co.nz +64 4 495 5255

Restaurant Brands NZ
3Q20 Sales Takeaways
Restaurant Brands (RBD) continues to deliver consistent quarterly sales growth, with positive same store sales (SSS) across all its operating divisions. KFC New Zealand remains a key highlight for the group with Taco Bell Hawaii also reporting strong sales growth. Whilst the core brands continue to deliver robust sales growth, at ~27x 12-month forward PE we believe significant earnings growth is priced in. We rate RBD UNDERPERFORM
What’s changed?

Earnings: Minor revisions
Target Price: NZ$10.30, unchanged
Rating: UNDERPERFORM

Strong momentum into year end
RBD reported 3Q20 sales of NZ$192m, another quarter of strong sales growth, up +5.8% on the prior year period. Year-to-date group sales are up +3.6%, largely in line with our revised full year run rate.

KFC NZ — Remains a standout performer for the group, maintaining strong SSS growth trajectory, up +5.5% in 3Q20 and +5.6% year to date.
Other NZ — Pizza Hut New Zealand SSS fell -3.2% (-4.1% YTD). Positively, Carl’s Jr. has maintained its momentum with 3Q20 SSS up +15.5% (+11.4% YTD). Carl’s Jr. continues to benefit from the introduction of UberEats; however, this growth will be harder to replicate into FY21E as it cycles the introduction of differentiated pricing on the delivery platform.
KFC Australia — Robust, albeit slower, SSS growth in 3Q20, up +3.9% (+5.3% YTD).
Hawaii — Both Pizza Hut and Taco Bell reported positive SSS growth. Taco Bell is experiencing particularly good growth, with SSS up +13.5%.

Taco Bell launch
RBD opened its first Taco Bell store in New Zealand, with a second store scheduled for March 2020. Taco Bell New Zealand reported sales of NZ$0.3m in its first three weeks of trading. We have a cautious view of Taco Bell at this stage given (1) the competitive Mexican quick service restaurant (QSR) space and (2) previous experience with the introduction of Carl’s Jr. RBD has also opened its first Taco Bell Australia, which began trading in 4Q20.
Change in balance date
RBD has changed its balance date to 31 December from 28 February, to better align with majority shareholder Finaccess Group. With little clarity around the impact of seasonal differences we have left our forecasts on a like for like basis at this stage.&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.&nbsp;

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

Restaurant Brands NZ: 3Q20 Sales Takeaways