MTY Food Group Inc (TSX: MTY) is a franchisor in the quick service and casual dining food industry. Its activities consist of franchising and operating corporate-owned locations as well as the sale of retail products under a multitude of banners.

Key Highlights

• Witnessed elevated system sales: In the fiscal year 2021, the company's system sales increased by 5% to CAD 3,631.3 million. The fast service restaurant concepts drove the year-over-year growth, accounting for 82% of the total year-over-year growth, or a 6% rise. Furthermore, digital sales in 2021 totaled CAD 803.6 million, or 23% of system sales, up from CAD 636.4 million, or 19% of system sales in 2020. Consumer transitions to online ordering for delivery and take-out have been pushed by the ongoing COVID-19 pandemic.

• Higher cash flows from operations and strong free cash flows: In the reported period of FY 2021, the company increased its cash flows from operating activities which stood at CAD 139.3 million compared to CAD 133.6 million in pcp. An increase in cash flows from operating activities was mainly due to a robust net income of CAD 85.9 million against a loss of CAD 36.8 million in pcp. Furthermore, the company also posted strong free cash flows which stood at CAD 139.0 million.
  

• Curtailing Long-term debt: A crucial positive is that the company is deleveraging its balance sheet. The corporation repaid CAD 22.7 million in long-term debt in the fourth quarter of 2021. Furthermore, the company reduced its long-term debt by 100.0 million on an annual basis, from CAD 447.6 million in pcp to CAD 347.6 million on November 30, 2021. The positive impact of this deleveraging process can be seen in the company's expenditure sheet, where interest on long-term debt was CAD 10.1 million in FY 2021, down from CAD 16.7 million in the prior year.

• Acquired Küto Comptoir à Tartares: The assets of Küto Comptoir à Tartares, a fast-growing chain of tartare restaurants operating in Quebec, was recently acquired by the Company's wholly owned subsidiaries for a total cash consideration of CAD 9.0 million-plus a deferred contingent value based on royalties and retail sales. There are presently 31 Küto Comptoir à Tartares franchised restaurants in operation.
  

Risk associated with investment

The performance of the company’s business is prone to several risks which could affect its income and liquidity. Risks related to resource supply, food processing, suppliers, customers, competition, and foreign exchange exposure are all beyond the management's control.

Financial overview of FY 2021 (In thousands of CAD)

Source: Company Filing

• In FY 2021, the company posted higher revenue at CAD 551.9 million against CAD 511.1 million in FY 2020. An increase in revenue was primarily due to healthy performance from all regions, where the Canadian region’s sales grew by 10% and total US & International sales grew by 6%.
• The company minimized its expenses in the reported period which stood at CAD 447.0 million in FY 2021, compared to CAD 568.0 million in FY 2020.
• The company transformed its net losses into net income in FY 2021 and reported a net income of CAD 85.9 million in FY 2021, compared to a net loss of CAD 36.8 million in FY 2020.
  

Valuation Methodology (Illustrative): Price to Earnings

Analysis by Kalkine Group 

Stock recommendation

After over two years of navigating through the COVID-19 epidemic, MTY was able to generate strong financial results and enhance its balance sheet in fiscal 2021 thanks to the strength of its brands and the durability of its business model, as well as the resilience of its franchisees. In 2021, the firm had robust free cash flows and profitability, with adjusted EBITDA of CAD168.6 million setting a new high. In addition, despite hurdles such as global supply-chain and labor issues, its system sales increased 5% year over year, which is a significant plus.

The company intends to generate organic growth based on a market recovery, as well as investments in its network and a solid franchise pipeline, according to management. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 52.28 as on March 10, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 10, 2022). Source: REFINITIV, Analysis by Kalkine Group 

   Technical Analysis Summary

Disclaimer

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