MTY Food Group Inc. (TSX: MTY) is a leading Canada-based company franchisor and operator of restaurants in North America, which provides quick-service and casual dining restaurants. The company operates in two segments, namely Canada and US & International. The company operates through a wide network of 7,300 locations including 137 corporates, 7,140 franchises and 23 joint ventures.

Q1FY20 Financial Highlights: For the first quarter of FY20, MTY reported solid operating performance and showed positive organic growth on EBITDA and system sales, driven by same store-sales growth of 2.1% on y-o-y basis. The group posted revenue of CAD 150.78 million, reflecting a growth of 41% on y-o-y basis, driven by the positive impact from acquisitions. MTY reported a higher system sale of CAD 999.5 million, depicting a growth of 45% from the previous corresponding period. EBITDA soared to CAD 41.0 million, up 45% from Q1FY19 while EBITDA margin stood at 27.2% against 26.2% in pcp. Free cash flows improved to CAD 30.74 million, significantly higher from CAD 26.75 million in the previous corresponding period. The Company reported net income of CAD 19.00 million, improved drastically from CAD 14.75 million in Q1FY19. Cash on hand stood at CAD 56.8 million, followed by a long-term debt of CAD 561.7 million at the end of Q1FY20.

Q1FY20 Financial Snapshots (Source: Company Reports) 

Stock Recommendation: The stock of MTY corrected ~43% so far this year due to weak investor sentiment coupled on account of COVID 19 pandemic. The stock of MTY has closed above its 20-days and 50-days simple moving average of CAD 26.24 and CAD 23.34, respectively, indicating a short-term bullish trend. The management’s primary focus is to reopen the temporary closed outlets and rebuild the customer confidence. However, customer spending patterns might shift temporarily or permanently post pandemic which poses a key risk to the group. The Company will observe the customer’s buying pattern and will emphasize on the innovation, product quality and customer service across the outlets in order to improve the sales volume. Currently, the restaurant segment is witnessing several challenges due to closure of the outlets, while on a long-term perspective, we assume that the demand is likely to pick up as the Government eases out the existing restrictions and the situation normalizes. The Company seems to have ample liquidity to mitigate the current situation while the business has delivered higher cash flows from operations, which is likely to support the near-term funding requirements.  Further, to support the near-term cash flows, the Company withdrew its dividend payment program. The stock is trading at a forward EV/Sales multiple of 2.3x, which is significantly below to industry (Hotels and Entertainment Service) average of 3.1x.  Hence, based on the aforementioned points and considering the risk factor, we recommend a ‘Speculative Buy’ on the stock at the closing market price of CAD 28.85 as on June 12, 2020.

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

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