Recipe Unlimited Corp

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.

The company would disclose its third-quarter earnings on November 06, 2020.

Q2FY20 Financial Highlights: Recipe Unlimited declared its second-quarterly results, wherein gross revenue was reported at CAD 140.4 million, significantly lower than CAD 311.9 million in the previous corresponding period (pcp). The significant decline was primarily attributable to a decline in the System Sales to CAD 389.8 million, as compared to CAD 871.3 million in pcp due to temporary closure of stores on account of COVID 19 pandemic, while partially supported by higher sales within the Retail and Catering segment. The company reported its Operating EBITDA at CAD 15.6 million, down from CAD 56 million in Q2FY19. Adjusted net earnings stood at CAD 6.2 million as compared to CAD 23.4 million in pcp, due to a slide in System Sales. The business reported a depressing bottom line and reported a loss of CAD 40.6 million against a net profit of CAD 16.6 million in Q2FY19, due to certain fixed costs coupled with a lower top-line. Meanwhile, 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 stores.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to the restaurant closure mandate by the State Governments, the food-service industry saw a steep decline in the sales volume, which subsequently reduced the royalty income of RECP to a greater extent. Continuation of the above trend would hinder the company’s over-all performance.

Valuation Methodology: P/E Based (Illustrative)

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

Stock Recommendation: Due to the closure of the food-service businesses, investors have avoided the sector in the recent past. The stock of RECP corrected ~47% so far this year. The company is emphasizing on innovative ways to drive its sales volume and would work on streamlining its product offerings in order to attract a higher number of customers. Furthermore, the company is providing help to the franchises through the Governments CEWS program to get rent assistance through the Recipe Rent Certainty Program, which would be reducing or deferring non-essential restaurant costs, and working with the franchise lending partners in order to defer franchisee rent payments. 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. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered MTY Food Group Inc, Premium Brands Holdings Corp and Jamieson Wellness Inc etc., as a peer group. Hence, considering the aforesaid facts, we recommend an ‘Avoid’ rating on the stock at the closing market price of CAD 10.39 on October 13, 2020.

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

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