MTY Group Inc (TSX: MTY) franchises and operates quick-service and casual dining restaurants under over eighty different banners across Canada, the United States and internationally. 

Key Highlights:

• Growth in system sales: In Q1FY22, the company reported its system sales of CAD 885.7 million, reflecting a jump of 16% on y-o-y basis. The growth was attributable to strong demand scenario on account of the recovery from the pandemic. Canada contributed to most of the increase, with an improvement of 46% despite impact of the Omicron variant during the quarter. Additionally, system sales from the US also increased by 4% over pcp, supported by the removal of most government-imposed restrictions in key states and territories.

• Surge in cash flow from operations: In Q1FY22, the company reported a higher cash flow from its operating activities of CAD 39.6 million v/s CAD 31.3 million in pcp. This was primarily driven by a higher net income coupled with better working capital management. The above is expected to support the company’s overall liquidity.

• Robust Profitability margins: The company commands a higher margin than the industry median, which is a key positive and illustrates improved operational efficiency. Notably, the company reported its EBITDA margin and operating margins at 25.4% and 16.7%, respectively, in Q1FY22, higher than the industry median of 15.4% and 9.3%, respectively. Moreover, the company’s net margin stood higher at 11.9% in Q1FY22, significantly higher than the industry median of 3.5%.

• Management update: The company reported that Mr. Nik Rupp was promoted to Chief Operating Officer, Papa Murphy's division from the post of Chief Financial Officer.

Risks associated with the investment:

The company might face steep competition due to entry of new player within the sector, which might lead to drag the market share of the company. Moreover, due to any shift in consumer taste and preferences, the product of the company might witness a slide in the sales volume. 

Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• MTY announced Q1FY22 result, wherein the revenue stood at CAD 140.4 million, higher than CAD 118.9 million in the previous corresponding period (pcp). The surge was primarily due to a higher income from the Canada region driven by improved demand dynamics from the Retail, food processing and distribution segment.
• The group reported a total expense of CAD 117.4 million, stood higher from CAD 101.6 million in pcp. The increase was due to an increase in the operating expenses, partially offset by lower depreciation and amortization costs and a side in interest on long term debt. Income before taxes stood at CAD 21.6 million v/s CAD 17.6 million in pcp, supported by higher revenue, partially offset by an increased input cost.
• Net income stood higher at CAD 16.6 million, as compared to CAD 13.4 million in pcp, due to higher income before taxes, partially offset by increase in income tax expense.

 Valuation Methodology (Illustrative): P/E based valuation

 Analysis by Kalkine Group

Stock Recommendation:  

For the first quarter of FY22, the company reported a higher adjusted EBITDA of CAD 35.6 million, increased from CAD 32.6 million in pcp. This is commendable as most of the business are struggling with higher input costs, which is leading to lower profitability. Despite the impact of the Omicron virus during the quarter, the company ended its operation on a positive note. We expect this pace is likely to continue in the coming quarters supported by ease of restriction norms and revival in the retail demand.

We have valued the stock using the Price to Earnings value-based relative valuation method and have arrived at a target upside of single-digit (in percentage terms). For the said purposes, we have considered peers like One Group Hospitality Inc, Premium Brands Holdings Corp and Ruth's Hospitality Group Inc. Hence, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 49.06 on June 13, 2022.

One-Year Technical Price Chart (as on June 13, 2022). Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV

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