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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>
USA Double Down — California Acquisition
Restaurant Brands (RBD) has announced the acquisition of a 70 store California based KFC franchisee for ~NZ$111m. The transaction price appears reasonable and the desire for a US beachhead acquisition has been well signalled, however we are yet to be convinced on the strategic merits. The US is a large and highly competitive market with KFC same store sales (SSS) modest at best, limited promotional control, and no obvious synergies. At this stage we assume the acquisition is value neutral and our target price is unchanged at NZ$10.30. Trading at ~28x 12-month forward PE, we believe significant earnings growth is priced in. In light of trading multiples and execution risk on aggressive growth plans we rate RBD UNDERPERFORM.
Acquisition details
RBD’s acquisition of a Southern California franchisee (59 KFC stores and 11 combined KFC/Taco Bell stores) represents an established beachhead in a new market. However, synergies are limited and with a clear mandate to grow further into the US it adds considerable risk to RBD’s existing business. We understand existing management will largely stay in place, which is important to mitigate some of the risk associated with entering a new market.
<ul>
<li>Multiple paid: The acquisition multiple, 6.1x trailing Store EBITDA, appears fair relative to similar RBD transactions and well behind RBD’s trading forward EV/ Store EBITDA prior to the announcement, ~12x.</li>
<li>Financing: The acquisition will be fully debt funded, lifting FY21E net debt/EBITDA to ~1.0x (~4.5x after adjusting for leases).</li>
<li>Acquisition conditions and timing: The transaction remains subject to approval from both the franchisor, Yum!, and existing landlords. Given RBD’s existing relationship with Yum! we expect conditions should be easy to meet. The acquisition is expected to settle in March 2020.</li>
</ul>
Strategic rationale
Near-term growth centres on a limited store reinvestment programme, which is already in place, with RBD considering opportunities to further invest in the market through either additional store roll out or further bolt-on acquisitions. Quarterly KFC US SSS growth has been relatively lacklustre in recent periods, ranging from -1% to +2%. In addition we see limited scope for RBD to extract margin expansion in the near-term given both cost pressures and the competitive nature of the US quick service restaurant market. At this stage we assume limited growth, organic or acquisitive, from the California business with RBD yet to provide detail on its specific growth ambitions.
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, i.e. forecasts are based on a February balance date.&nbsp;
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Investment View
Transformational acquisitions in Australia, Hawaii, and more recently California mean RBD is now a materially different business. The combined portfolio offers a significant array of growth options, albeit brings additional complexities and higher risk. We rate RBD as UNDERPERFORM with substantial growth already priced in.&nbsp;
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Guy Hooper guy.hooper@forsythbarr.co.nz +64 4 495 5255

Restaurant Brands NZ
USA Double Down — California Acquisition
Restaurant Brands (RBD) has announced the acquisition of a 70 store California based KFC franchisee for ~NZ$111m. The transaction price appears reasonable and the desire for a US beachhead acquisition has been well signalled, however we are yet to be convinced on the strategic merits. The US is a large and highly competitive market with KFC same store sales (SSS) modest at best, limited promotional control, and no obvious synergies. At this stage we assume the acquisition is value neutral and our target price is unchanged at NZ$10.30. Trading at ~28x 12-month forward PE, we believe significant earnings growth is priced in. In light of trading multiples and execution risk on aggressive growth plans we rate RBD UNDERPERFORM.
Acquisition details
RBD’s acquisition of a Southern California franchisee (59 KFC stores and 11 combined KFC/Taco Bell stores) represents an established beachhead in a new market. However, synergies are limited and with a clear mandate to grow further into the US it adds considerable risk to RBD’s existing business. We understand existing management will largely stay in place, which is important to mitigate some of the risk associated with entering a new market.

Multiple paid: The acquisition multiple, 6.1x trailing Store EBITDA, appears fair relative to similar RBD transactions and well behind RBD’s trading forward EV/ Store EBITDA prior to the announcement, ~12x.
Financing: The acquisition will be fully debt funded, lifting FY21E net debt/EBITDA to ~1.0x (~4.5x after adjusting for leases).
Acquisition conditions and timing: The transaction remains subject to approval from both the franchisor, Yum!, and existing landlords. Given RBD’s existing relationship with Yum! we expect conditions should be easy to meet. The acquisition is expected to settle in March 2020.

Strategic rationale
Near-term growth centres on a limited store reinvestment programme, which is already in place, with RBD considering opportunities to further invest in the market through either additional store roll out or further bolt-on acquisitions. Quarterly KFC US SSS growth has been relatively lacklustre in recent periods, ranging from -1% to +2%. In addition we see limited scope for RBD to extract margin expansion in the near-term given both cost pressures and the competitive nature of the US quick service restaurant market. At this stage we assume limited growth, organic or acquisitive, from the California business with RBD yet to provide detail on its specific growth ambitions.
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, i.e. forecasts are based on a February balance date.&nbsp;

Investment View
Transformational acquisitions in Australia, Hawaii, and more recently California mean RBD is now a materially different business. The combined portfolio offers a significant array of growth options, albeit brings additional complexities and higher risk. We rate RBD as UNDERPERFORM with substantial growth already priced in.&nbsp;

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

Restaurant Brands NZ: USA Double Down — California Acquisition