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 Q1 2022, the company’s system sales increased 16% year-over-year to CAD 885.7 million mainly due to the momentum in the recovery from the COVID-19 pandemic. Despite the effects of the Omicron variant, Canada contributed most of the growth with a 46% increase year-over-year. US system sales grew 4%, while international system sales improved 12% in the first quarter of 2022. Casual dining concepts added CAD 44.0 million to overall growth in the first quarter of 2022, an increase of 86% year-over-year.

• Higher cash flows from operations and strong free cash flows: In the reported period of Q1 2022, the company increased its cash flows from operating activities which stood at CAD 39.6 million compared to CAD 31.3 million in pcp. An increase in cash flows from operating activities was mainly due to higher net income of CAD 16.6 million. Furthermore, the company also posted strong free cash flows which stood at CAD 36.9 million, compared to CAD 30.3 million in pcp.

• Curtailing Long-term debt: A crucial positive is that the company is deleveraging its balance sheet. The corporation repaid CAD 10.1 million of its long-term debt in Q1 2022. The positive impact of this deleveraging process can be seen in the company's expenditure sheet, where interest on long-term debt was CAD 1.3 million in Q1 2022, down from CAD 3.2 million in the prior year.

• Industry beating margins: The resilient business, management’s solid determination along prudent steps along elevated system sales helped the company in leaping the industry median margins on many fronts in Q1 2022, which is a key positive. The chart below gives a glimpse of this.

Source: REFINITIV, Analysis by Kalkine Group

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 Q1 2022 (In thousands of CAD)

Source: Company Filing

• In Q1 2022, the company posted higher revenue at CAD 140.4 million against CAD 118.9 million in Q1 2021. An increase in revenue was primarily due to increased recurring revenue streams from franchise locations in Canada and higher food processing, distribution, and retail revenues in Canada.
• The company witnessed steady expenses in the reported period which stood at CAD 117.4 million in Q1 2022, compared to CAD 101.6 million in pcp, despite the higher revenues.
• The company’s net income increased to CAD 16.6 million in the reported period, compared to CAD 13.4 million in pcp, partially offset by higher tax expense.

Valuation Methodology (Illustrative): EV/EBITDA based

Analysis by Kalkine Group 

Stock Recommendation

Recently, the company reported its Q1 2022 financial numbers, under which its network showed a great resilience, as its system sales increased 16% year-over-year to CAD 885.7 million mainly due to the momentum in the recovery from the COVID-19 pandemic. Profitability in terms of net income attributable to owners and adjusted EBITDA increased 24% and 9% year-over-year, respectively. Additionally, it posted elevated free cash flow numbers, which is a key positive.

The company is highly encouraged by the opening of 75 new locations throughout its network in the first quarter, which makes it the best first quarter in its history in terms of restaurant openings. Moreover, the group is opportunistically seeking acquisitions to supplement organic growth in order to generate added value.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the last closing price of CAD 50.96 as on May 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 May 10, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

  Technical Analysis Summary

Disclaimer

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