Pizza Pizza Royalty Corp

Pizza Pizza Royalty Corp. (TSX: PZA) operates in a quick-service restaurant (QSR) business and offers pizzas and other food items to its consumers. The company derives its royalty income from more than 700 restaurant outlets. The company announced a monthly cash dividend of CAD 0.05 per common share, payable on July 15, 2020.

Q1FY20 Financial Highlights: PZA declared its first-quarter results, wherein the company reported total system sales of CAD 125.75 as compared to CAD 133.91 million in pcp. The quarter was marked by 6.6% Same-store decline in the sales due to the negative impact of the temporary closure of stores and lower traffic in the stores due to social-distancing mandate. The company witnessed a decline in the royalty income, which stood at CAD 8.16 million compared to CAD 8.72 in the previous corresponding quarter. The group recorded marginally lower interest costs and a slightly higher administrative expense. Adjusted earnings available for distribution stood lower at CAD 7.74 million, as compared to CAD 8.31 million, a year ago. Adjusted earnings available for shareholder dividends was recorded at CAD 4.28 million against CAD 4.92 million in Q1FY19. During the first quarter, all traditional Pizza Pizza and Pizza 73 restaurants more or less remained open across Canada. However, stores of PZA were temporarily closed at fifteen locations on account of the ongoing pandemic.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: Covid-19 is likely to result in higher unemployment which might change the consumer spending behavior. A change in consumer spending might affect the business of the group. Further, a second wave of the novel virus would result in store closure, which would hamper the financial performance of the company.

Stock Recommendation: The stock of PZA corrected ~16% so far this year owing to a panic created in the equity market by COVID-19. The company witnessed a major setback due to the recent closure of the stores and reported a declined performance. The delivery and pickup sales of the company were stable and are actively taking additional measures to drive growth in the delivery business. The company derives a major chunk of its revenue via delivery segment. Though the walk-in reduced in April, the company recorded an increase in stores walk-ins in May 2020 onwards, which is encouraging. Going forward, we expect the demand in delivery and pick up to remain stable, while store walk-ins to improve gradually. Furthermore, at the current price levels, the stock is offering a dividend yield of 7.34%, which is lucrative, considering the low-interest-rate environment in the economy. The stock of PZA is quoting at a very attractive valuation on a next twelve months basis. The stock is available at an EV/Sales of 0.5x as compared to industry (hotels & entertainment services) median of 2.2x. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 8.17 on July 9, 2020.

PZA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Recipe Unlimited Corporation

Recipe Unlimited Corp (TSX: RECP) is a restaurant operator in Canada. It has divided the operations into the business segments of Corporate restaurants, Franchise restaurants, Retail and catering, and Central operations. Recently, the company announced a CAD 35 million rent subsidy program to assist its franchise network with direct rent support through the entire FY20. 

Q1FY20 Financial Highlights: RECP declared its quarterly results, wherein the company reported a gross revenue of CAD 269.9 million as compared to CAD 304.6 million in the previous corresponding period (pcp). The decline was due to a decline in the system sales to CAD 747.2 million compared to CAD 850.7 million in Q1FY19. The quarter was marked by the closure of ~42% of the corporate and franchise restaurants, while the rest were opened partially. Operating EBITDA stood at CAD 20.5 million as compared to CAD 50.1 million, a year ago. The company reported an operating loss of CAD 10.7 million as compared to an operating income of CAD 31.5 million in pcp, majorly attributed to lower system sales. Net loss, during the quarter, stood at CAD 41.2 million as compared to a net profit of CAD 22.7 million in Q1FY19. The Company's Retail and Catering divisions remained open as the segment comes under the essential service and continue to supply branded and private label products to grocery customers.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of RECP corrected ~63% so far this year. The Group disclosed that all franchisees are coming with 'Safe Reopening Blueprints' strategy which includes modified floor plans for social distancing, heightened sanitation practices, wellness checks for all teammates and other practices in order to regain consumer confidence. Due to the ongoing crisis, the Group took several prudent measures like suspension of the collection of royalty fees and advertising payments from their franchisee network, suspension of dividends, share-buybacks combined with pay cut across the senior leadership team. The board of directors and CEO also temporarily suspended their compensation as well. The above measures would ensure liquidity within the business. Due to the restriction in operational activities, we believe near-term challenges would likely to continue for a while till the sector becomes operational in full-fledge. The above measure seems promising, but a change in consumer spending pattern might impact the business operations in the near term. On the valuation front, the stock is trading at a forward EV/EBITDA multiple of 8.1x, which is more or less in line with the industry (Consumer Cyclical) median of 9.6x. Hence, we recommend a ‘Watch’ rating on the stock at the current closing price of CAD 9.62 on July 09, 2020.

RECP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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