Restaurant Brands International Inc. (TSX: QSR) is a leading global quick-service restaurant chain and derives its revenue primarily from franchise royalties and distribution sales to franchisees. The company has more than 29,000 stores across the globe.

Key Investment Rationales:

• Prominent Brand presence: The group operate through several well-established brands like Burger King®, Tim Hortons® and POPEYES®, and has a tremendous presence across more than 100 countries. Notably, the company’s System-wide Sales stood at USD 35,495 million, higher than USD 30,669 million in FY20, driven by lower impact of temporary closures of specific restaurants during the second half of FY21.

• Growing traction from the digital segment: Globally, the digital sales of company in FY21 has registered a 65% y-o-y jump to USD 10 billion as compared to USD 6 billion in FY20, representing ~30% of the company’s system-wide sales. The growth was driven by increasing demand from Tim Hortons and Popeyes brands across the international markets. Notably, on account of the increasing demand, the company added 1,200 net new restaurants in FY21, which is the highest to date.

• Opening of 100 Popeyes® restaurants in South Korea: Recently, the company disclosed its plan to open one hundred Popeyes® restaurants across South Korea in the coming years. Within the Popeyes® brand, the company offers recipes like chicken sandwiches, spicy chicken, chicken tenders, fried shrimp, and other regional items. Notably, QSR uses proprietary seasonings and techniques developed by its in-house team and has a distinguished customer base. Being one of the prominent chicken QSR markets, South Korea offers ample scope of expansion for the company.

• Introduction of new variants: On March 07, 2022, the company introduced three New Handheld Toasted Sandwiches under the Whopper Melts category, namely Whopper Melt, Spicy Whopper Melt and Bacon Whopper Melt. Notably, these items are available across all its existing stores in the domestic market. This is likely to attract several new customers and is a key positive.

• Impressive dividend yield: The stock of QSR carries a dividend yield of ~3.893% on an annualized basis, which looks attractive considering the futuristic interest rate scenario. Moreover, the company paid a higher dividend of USD 974 million in FY21, as compared to USD 959 million in FY20. This is impressive as most of the companies are lowering their dividend distribution in order to retain liquidity.

Five-years dividend distribution (Source: REFINITIV, Analysis by Kalkine Group.)

• Strong profitability margins: In FY21, the company reported its EBITDA margin and operating margin of 36.5% and 32.5%, respectively, as compared to the industry median of 15.8% and 9.2%, respectively. This indicates better cost management on an operational level. The company also reported its net margin of 21.8% in FY21, higher than the industry median of 4.7%.

• Robust Cash flows: In FY21, the company reported a strong cash flow from its operations of USD 1,726 million, significantly higher than USD 921 million in FY20, supported by higher net profit. This enhances the company’s overall liquidity, which is a key positive as it would allow the company for future expansion and capital investment. Notably, the company’s free cash flow grew to USD 1,620 million in FY21, which is significantly higher than USD 804 million in the previous year.

Risk associated with the investment:

Further imposition of restrictions would likely impact the company’s sales volume and would dampen the overall performance. Moreover, the company added new stores in the recent past, and a slowdown in operations would hinder the company’s return ratios. 

FY21 Financial Highlights: (In thousands of USD)

FY21 Income Statement Highlights (Source: Company Reports)

• Elevated Revenue: QSR announced its full result, wherein the company posted total revenue of USD 5,739 million in FY21, as compared to USD 4,968 million in FY20. The growth was driven by 18.9% and 13.2% y-o-y, respectively, growth from both Tim Hortons and Birger King segments, respectively.

Source: Company Report

• Rise in input costs: Total operating costs and expenses stood higher at USD 3,860 million in FY21, as compared to USD 3,546 million in FY20, due to higher cost of sales, increase in advertising expense, coupled with a surge in general & administrative expenses. Despite a surge in the input costs, the company’s income from operations stood higher to USD 1,879 million from USD 1,422 million in FY20, supported by an increase in total sales.

• Strong growth in bottom-line: The company reported its net income of USD 1,253 million, higher than USD 750 million in FY20, driven by higher income from operations, partially offset by higher income tax expense.

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 43.39% stake, Capital World Investors, Pershing Square Capital Management, L.P. are the major shareholders in the company with an outstanding position of 12.09% and 7.72%, respectively.

Source: REFINITIV, Analysis by Kalkine Group.

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock recommendation

The company operates with the leading brands within the Quick Service Restaurant (QSR) segment and has a worldwide presence along with an impressive consumer base, which ensures sustainable cash flows to the firm. Notably, the company’s adjusted EBITDA, surged to USD 2,248 million from USD, 1,864 million in pcp. Moreover, the group witnessed an increase in its digital sales, including delivery, due to a shift in consumer behaviour on account of pandemic. We expect the momentum to continue in the coming quarters, which would likely support the company’s upcoming sales volumes. We have valued the stock using EV to Sales-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Mcdonald's Corp, Wendys Co etc. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of QSR at the closing price of CAD 70.62 on March 04, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing. 

One-Year Technical Price Chart (as on March 04, 2022). Analysis by Kalkine Group

*Recommendation is valid on March 07, 2022, price as well. 

Technical Analysis Summary

Disclaimer

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