Restaurant Brands International Inc.

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

Key Highlights:

• Improved Net Restaurant Count: In Q1FY21, the company reported increase in its Restaurant count although the economic condition was grim for the business. Restaurant count for company’s Tim Hortons® brand (“Tim Hortons” or “TH”), where it serves premium coffee and other beverage rose to 4,987 v/s 4,925 in pcp. For chicken under the Popeyes® brand (“Popeyes” or “PLK”), company owned restaurants increased to 3,495 from 3,336 in pcp. However, restaurant count for fast food hamburgers principally under the Burger King® brand (“BK”) declined slightly to 18,691 from 18,848 in pcp. Moreover, In Q1 FY21 the QSR total restaurant count increased to 27,173 from 27,109 compared to previous year same quarter.

• Strong Cash flow growth: In Q1FY21, the company reported a surge in its bottom line, which has further contributed to the cash flow growth. During the quarter, the company reported its cash from operating activities at USD 266 million, up from USD 136 million in Q1FY20. Moreover, the company’s performance was further supported by improved working capital management.

• Issuance of Senior Notes: Recently, the company reported the issuance of USD 800 million of Senior Secured Notes, which bears an interest of 3.875%. The due date of the above notes is in 2028. This is expected to enhance the company current liquidity level, which would further support the company’s working capital and capital investments.

• Sign of revival: In the first quarter of FY21, most of the company’s stores remained opened (~95%) across the globe, supported by impressive store opening rate from the North America and Asia Pacific. The Management expects the conditions to improve in the coming days, supported by further ease out of restrictions, which would support the company’s overall performance in the coming days. On a long-term basis, the company’s Burger King reported fruitful result from $ 1 your way value menu and is planning to introduce 1,000 new restaurants in the next ten years across the UK, India, Mexico and Saudi Arabia.

Q1FY21 Financial Highlights:

• QSR announced its quarterly result, wherein the company posted total revenues of USD 1,260 million, slightly higher than USD 1,225 million in the previous corresponding period (pcp). The improvement was driven by improved performance from all the three segments, primarily franchise & property revenue segment (USD 548 million v/s USD 525 million in pcp).
• Total operating costs and expenses dipped slightly to USD 818 million, from USD 836 million in Q1FY20. Advertising expenses stood slightly higher at USD 236 million, as compared to USD 226 million in pcp, while franchise and property expenses came lower than pcp (USD 116 million v/s USD 123 million in pcp). Income from operations surged to USD 442 million, from USD 389 million in Q1FY20.
• The company reported its net income at USD 271 million, higher than USD 224 million Q1FY20.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risk: Further imposition of restrictions would likely to impact the company’s sales volume and would dampen the overall performance. Moreover, the company added new stores in Q1FY21, and a slowdown in operations would hinder the company’s return ratios.

Valuation Methodology (Illustrative): Price to Earnings based methodology.

Stock Recommendation:

During the first quarter of FY21, the company reported a higher dividend distribution of USD 239 million compared to USD 232 million in pcp, and the stock is offering a decent dividend yield of 3.23% amid low interest rate environment. The company added 148 new restaurants, while the company’s leading brand, Tim Hortons reported strong digital sales growth in Q1FY21. 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 Mcdonald's Corp, Chipotle Mexican Grill Inc etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 80.43 on July 15, 2020.

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

One-Year Technical Price Chart (as on July 15, 2021). Analysis by Kalkine Group

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

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