Restaurant Brands International Inc.

Restaurant Brands International Inc. (TSX: QSR) is a leading global quick-service restaurant chain and derives its revenue primarily from franchise royalties and distribution sales to franchisees. 

• Decent Dividend Yield: Historically, the company paid consistent dividends across economic cycles, supported by stable cash flow generation. The company operates with the leading brands within the Quick Service Restaurant (QSR) segment and has a worldwide presence along with an impressive consumer base, which ensures stable cash flow generation. Notably, the stock carries a dividend yield of ~3.2%, which is decent considering the current interest rate scenario.

Source: REFINITIV, Analysis by Kalkine Group

• Strong Brand presence: The company operates through its well-established brand like Burger King®, Tim Hortons® and POPEYES®, which has tremendous brand presence, and the products are available across more than 100 countries. Notably, the management reported that the unit growth has returned to pre-pandemic levels, which is noteworthy. Moreover, despite an economic slowdown, the company successfully opened 378 net new restaurants during the first half of FY21.
• Improved performance resulted in solid cash flows growth: The company reported a revival in its operations, supported by an increase in system-wide sales in all the brands, which illustrates a recovery in the demand dynamics coupled with favourable FX movements. Cash from operations surged to USD 745 million in H1FY21, as compared to USD 196 million in pcp, supported by solid growth in net income (USD 662 million in H1FY21, v/s USD 388 million in pcp). Free cash flow during the last twelve months basis stood higher at USD 1,346 million, higher than USD 1,110 million, a year ago. The increase in cash flow supports the company’s overall liquidity.
• Management Update: On August 23, 2021, the company announced the appointment of  Tom Curtis as the President of Burger King U.S. & Canada.

Q2FY21 Financial Highlights:

• QSR announced its quarterly result, wherein the company posted total revenues of USD 1,438 million, jumped from USD 1,048 million in the previous corresponding period (pcp). The increase was driven by higher income from system-wide sales in all the brands, supported by the addition of quality menu items, coupled with the rapid adoption of the digital channels.
• Total operating costs and expenses were recorded at USD 950 million, increased from USD 805 million in the previous corresponding period (pcp). The increase was driven by a higher cost of sales, coupled with a surge in general & administrative expense and advertising expense.
• Income from operations climbed USD 488 million, from USD 243 million in pcp, supported by higher revenue, partially offset by an increase in total operating costs and expenses.
• The company reported its net income at USD 391 million, significantly higher than USD 164 million in Q2FY20.

Source: Company Report

Risk: If the country’s decided to impose further restrictions that would likely to impact the company’s sales volume and would dampen the overall performance.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation: The company commands a higher margin than its peers, which reflects improved operational efficiency. Notably, in Q2FY21, QSR EBITDA margin and gross margin stood at 38.6% and 33.9%, respectively, which was higher than the industry median of 18.4% and 12.4%, respectively. Moreover, net margin during the period stood higher at 27.2%, as compared to the industry median of 7.5%. The company is prioritizing Digital sales in home markets and introduced attractive customer loyalty programs in order to drive its sales volume in the coming quarters. We have valued the stock using P/E-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Starbucks Corp, Yum! Brands Inc etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 81.53 on September 9, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on September 9, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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