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 declared a monthly cash dividend of CAD 0.05 per common share, payable on August 14, 2020.

Q2FY20 Financial Highlights: PZA announced its second-quarter results, wherein the company reported total system sales of CAD 113.506 as compared to CAD 134.250 million in the previous corresponding period (pcp). The quarter was marked by 16.3% same-store sales decline primarily attributable 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 7.452 million, reflecting a decline of 15.5% on y-o-y basis largely due to non-traditional restaurant temporary closures. The group recorded marginally lower interest costs and a slightly higher administrative expense. Adjusted earnings available for distribution stood lower at CAD 7 million as compared to CAD 8.272 million, a year ago. Adjusted earnings from operations were recorded at CAD 5.834 million, stood lower than CAD 6.850 million in Q2FY19. During the quarter, the group opened one traditional restaurant, and one non-traditional Pizza Pizza location, five traditional and eight non-traditional Pizza Pizza restaurants were permanently closed. Furthermore, the company opened one traditional Pizza 73 restaurant and closed one non-traditional Pizza.

Q2FY20 Income Statement Highlights (Source: Company Reports) 

Risks: Due to rising unemployment on account of Covid-19 consumer might opt for lowering their discretionary spending. A change in consumer spending might affect the business and a second wave of the novel virus would result in store closure which might affect the sales volume as well.

Valuation Methodology: Price to Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The Stock of PZA corrected ~7% so far this year, due to a store closure scenario on account of COVID 19 pandemic. The company witnessed a major setback due to the recent closure of the stores and reported a declined performance. The company reported an improved sales volume for the month of July, which is encouraging. July comparable sales have rebounded quickly, up 20 percentage points from April sales. The group’s traditional restaurants posted solid results in the latter part of the quarter and into July, and account for approximately 90% of Royalty Pool System Sales. The group’s delivery and pickup sales, particularly through digital channels, grew significantly throughout the second quarter, nearly offsetting a major decrease in our dine-in sales. The company derives a major chunk of its revenue via delivery segment, and the company has relaunched its digital ordering apps, which is likely to be the major sales-driver, in the future. Most of the non-traditional restaurants, which account for 10% of sales, remain closed due to government restrictions; however, most of the provinces beginning to ease restrictions on some of these captive-market locations. As well, many key municipalities recently began allowing restaurant dine-in to resume, which we expect to provide a helpful tailwind to the overall business. Further, the company continues to distribute dividend amid challenging time, which is encouraging from an income investor’s point of view. At the last traded price, the stock was offering a dividend yield of 6.62%, which is lucrative considering the current interest rate environment. We have valued the stock using the P/E based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered industry (Hotel & Entertainment Services) median on NTM basis. Hence, considering the aforesaid facts and current price movement, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 9.07 on August 14, 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 four business segments, namely, Corporate restaurants, Franchise restaurants, Retail and catering, and Central operations.

Q2FY20 Financial Highlights: Recipe Unlimited announced its quarterly results, wherein the company reported gross revenue of CAD 140.4 million, reflecting a decline of 55%. The decline was driven by a decline in the System Sales to CAD 481.5 million as compared to CAD 389.8 million in Q2FY19. The quarter was marked by a significantly lower System Sales, which was primarily attributable to a lower restaurant sale on account of the government mandate for restaurant closures, partially offset by higher sales in the Retail and Catering segment. Operating EBITDA stood at CAD 15.6 million as compared to CAD 56 million, a year ago. The company reported adjusted net earnings at CAD 6.2 million as compared to adjusted net earnings of CAD 23.4 million in the previous corresponding period (pcp), majorly attributed to lower system sales. Net loss, during the quarter, stood at CAD 40.6 million against a net profit of CAD 16.6 million in Q2FY19. During FY20, the company closed 28 restaurants, which includes seven corporate, twenty franchise and one joint venture locations. At the end of the second quarter, the company were operating at 1,228 locations, representing 90.7% of the total restaurants.

Q2FY20 Financial Snapshot (Source: Company Reports)

Risks: The business witnessed major shock from the government mandate of restaurant closure, and the group witnessed a drastic correction in the margin, which has hindered the overall Financial flexibility of the company. Continuation of the restaurant closure or the second wave of the novel virus would dampen the group’s financial performance.

Valuation Methodology: EV to Sales Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:  The stock soared ~19% and ~15% in the last one month and three months, respectively. Due to the unexpected lockdown scenario, the food-service sales across Canada dipped more than 60% on y-o-y basis, and the continuation of the above trend would lead to uncertainty. The Government has eased restrictions on business operations, and in particular restaurant segment at a lower capacity. Meanwhile, we are skeptical about how quickly consumer demand will resume and at what capacity restraints may be enforced by various government authorities. Thus, the food-service businesses are likely to bear the heat of lower consumer traction, thereby dampening the volume sales of the Company in the coming days. Management is focusing on preserving the liquidity levels by closing the locations which are gaining the lowest traction and obtaining sufficient financial support from the Government. We have valued the stock using the EV to Sales relative valuation approach and arrived at a target price, which suggests a double-digit downside potential (in % terms). For the said purpose, we have considered peers like High Liner Foods Inc, Great Canadian Gaming Corp and Spin Master Corp etc. Hence, considering the aforesaid facts and current price movement, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 11.05 on August 14, 2020.

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

Disclaimer

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