Company Overview: Restaurant Brands International Inc. is a quick service restaurant (QSR) company. The Company had over 23,000 restaurants in more than 100 countries and the United States territories, as of September 30, 2017. It operates through three segments: Tim Hortons (TH), Burger King (BK) and Popeyes Louisiana Kitchen (PLK). TH restaurants are quick service restaurants with a menu that includes blend coffee, tea, espresso-based hot and cold specialty drinks, baked goods, including donuts, Timbits, bagels, muffins, cookies and pastries, grilled paninis, classic sandwiches, wraps and soups, among others. BK restaurants are quick service restaurants that feature flame-grilled hamburgers, chicken and other specialty sandwiches, French fries, soft drinks and other food items. PLK restaurants are chicken quick service restaurants that feature Louisiana style menu, including chicken tenders, fried shrimp and other seafood, red beans and rice, and other regional items.

 

Stocks’ Details 

Incorporated in 2014, Restaurant Brands International Inc. (TO: QSR) is a Canada based company and is one of the world's quick-service restaurant companies. QSR has over US$34 billion in system-wide sales and owned or franchised ~27,000 restaurants in greater than 100 countries and U.S. territories. The company came into existence with the merger of Tim Hortons Inc. and Burger King Worldwide Inc. QSR also acquired Popeyes Louisiana Kitchen in 2017 for ~US$1.7 billion. Restaurant Brands International has three operating and reportable segments, namely Tim Hortons, Burger King and Popeye’s Louisiana Kitchen. Tim Hortons brand maintains a robust base of restaurants across the United States, Canada, and the Middle East, while the Burger King mainly serves customers across the globe. Popeye’s Louisiana Kitchen was founded in 1972, and it owns or franchises ~3,102 restaurants in the United States and other countries.

Financial Highlights – FY19 (figures are in US$)

Tim Hortons contributed ~60% in QSR’s total sales of FY19 and increased 1.6% on a year over year basis. Revenues from Burger King and Popeye’s Louisiana Kitchen accounted for ~32% and ~8% of total revenue in FY19, respectively. Burger King and Popeye’s Louisiana Kitchen increased 7.7% and 16.4%, respectively in FY2019 on a year over year basis. The company witnessed a compound annual growth rate of ~8.4% in its revenue across FY15-FY19. The company remains on track to open more than 40,000 restaurants in the coming 8-10 years. During the year, Burger King segment recorded the largest restaurant growth in the last two decade, while Popeyes introduced a new product (Chicken Sandwich), which acted as a game-changer for the brand. The consolidated system-wide sales grew ~8.3% in 2019, on the back of higher system-wide sales from Burger King, which increased ~9.3% and Popeyes where system-wide sales, which increased more than 18%. However, system-wide sales in Tim Hortons segment fell ~0.3%. Notably, cash flow from continuing operating activities rose at a CAGR of ~5.2% across FY15-FY19. The company paid a total of more than $900 million as dividend in FY19. The adjusted diluted EPS stood at $2.72, up from $2.63 recorded in the prior year, representing growth of 4%.

Geographical Representation (Source: Company Reports)

Financial Highlights – Q4FY19 (figures are in US$) 

Q4FY19 Financial Highlights for the period ended 31 December 2019: Restaurant Brands International, reported decent fourth-quarter 2019 results, wherein both top and bottom line increased on a year over year basis, on the back of robust performance in all the operating segments. The company’s adjusted earnings came in at 75 cents per share, which increased ~10% from 68 cents per share reported in the year-ago quarter. Total revenues for the quarter came in at $1,479 million, which improved 6.8% from the year-ago quarter, primarily attributed to higher system-wide sales across its brands. 

Segmental Revenues in 4QFY19:

Tim Hortons: 4QFY19 revenues stood at $872 million compared to $852 million recorded in the prior-year quarter. The net restaurant growth increased by 1.8% during the quarter. However, system-wide sales recorded a decline 2.9% when compared the previous corresponding period.

Burger King: Revenues from this segment stood at $462 million in the fourth quarter, an increase of 8.4%, year over year, mainly driven by higher franchise and property revenues. Further, system-wide sales for the quarter increased by 8.4% from the year-ago period. Notably, net restaurant growth during the quarter was 5.9%. International system-wide sales grew ~15% with robust growth across Asian markets fuelled by comparable sales growth, enhanced access of digital channels and substantial unit growth.

Popeye’s Louisiana Kitchen: Revenues for the period came in at $145 million, marking a jump of ~36.8% from $106 million reported in the year-ago quarter. System-wide sales climbed 42.3% from the prior-year period, on the back of net restaurant growth of 6.9% and introduction of the Chicken Sandwich during the quarter.

4QFY19 Key Highlights (Source: Company Reports) 

Operating Highlights: During the quarter, the company’s adjusted EBITDA rose ~7.8% on an organic basis, indicating the sharpest growth rate in the last eight quarters, driven by healthy year-over-year sales growth at Burger King and Popeyes. Segment-wise, Tim Horton’s adjusted EBITDA dipped slightly by 0.2% year over year, Burger King’s EBITDA grew 9% while Popeye’s EBITDA was up 63% from a year ago. 

Balance Sheet & Cash Flow Details: The group’s fourth quarter cash and cash equivalent balance stood at $1,533 million while total debt stood at $12.3 billion. The company declared a dividend of $0.52 per common share for first-quarter 2020, payable on April 3, 2020 to its shareholders. The company also stated that it is targeting a total of $2.08 dividends per share for FY20. Cash flow from operations for FY19 stood at $1,476 million, with free cash amounted to $1,414 million.

Cash Flow Sneak Peak (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 34.36% of the total shareholding. T. Rowe Price Associates, Inc. is the entity holding maximum shares in the company at 6.1%. Pershing Square Capital Management, L.P.is the second-largest shareholder, with a holding of 5.06%.

Top Ten Shareholders (Source: Thomson Reuters) 

Digging into QSR’s Recent Updates: 

On January 7, 2020, the company’s Burger King stated that it is examining the impossible Croissan’wich sandwich. Following this, Burger King becomes the first restaurant which is testing Sausage made from plants.

On December 5, 2019, QSR’s Burger King announced its plan to increase its foothold in Canada, in an effort to drive sales. In the next five years, the group intends to open more than 100 outlets in Ontario and Manitoba under this plan.

Key Metrics:  In FY19, the company had a gross margin of 67.6%, which was higher than the FY18 figure of 66.6%.  EBITDA margin and Operating margin also remained more or less stable. Further, quick ratio and current ratio in FY18 stood at 1.24x and 1.29x, as compared to FY18 figure of 1.01x and 1.06x, respectively, depicting a sound liquidity position.

Key Metrics (Source: Thomson Reuters) 

Outlook: The company’s master franchise and expansion deals in several geographies also praiseworthy. QSR remains optimistic regarding the presence of massive growth opportunity for growing all the three brands globally by entering new markets and strengthening foothold in the existing markets. For 2020, the company is taking initiatives to enhance the experience at Burger King and Tim Hortons. In doing so, the company aims to unveil outdoor digital menu boards on an advanced basis, specially at drive -through locations. The group is planning to implement a digital menu at half of Burger King locations in the U.S. along with most of the Tim Hortons system in Canada in 2020.

The company opines that new and existing product enhancement is a key growth driver for its brands, and the company will continue to focus on this, going forward. This is likely to improve the customer base and will continue to build brand leadership in taste, along with better food quality. The company had also taken steps to reinvent the donut line-up with quality donuts and rolled out the dream donuts across Canada. This move has well-positioned the company to capitalize on growth prospects with over 2600 drive-through locations across Canada.

Going forward, the management intend to invest in digital initiatives like digital ordering to boost sales. Following its digital push, the group introduced mobile order and pay app for Burger King in the United States, which is expected to be a growth driver, going forward.

The company is operating on a fully franchised model which is turning out as a core strength. Going forward, the group might face some challenges in drawing new franchisees for all brands in new and existing markets following a stiff competition in quick-service restaurant industry.

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: 

Method 1: Price to Cash Flow Multiple Approach

Price to Cash Flow Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Method 2: P/E Multiple Approach

P/E Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: As on 23 February 2020, the stock has a market cap of CAD 40.44 billion with a P/E multiple of ~26.41x and an annual dividend yield of ~3.2. The company has also witnessed a compound annual growth rate of ~8.4% in its revenue in a time span of FY15-FY19. Restaurant Brands remain focused on enhancing its level of service via attractive menu options to boost customer satisfaction, and thereby drive growth, going forward. We have valued the stock using two relative valuation methods, i.e., P/CF multiple and P/E multiple, and for the said purpose, we have considered peers like Mcdonald's Corp (NYSE: MCD), Chipotle Mexican Grill Inc (NYSE: CMG), Yum! Brands Inc (NYSE: YUM), to name few. We have arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the above factors, we give a “Buy” recommendation on the stock at the current market price of $87.2 per share, down ~0.9% on 23 February 2020.

QSR Daily Technical Chart (Source: Thomson Reuters)

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