MTY Group Inc

MTY Group Inc (TSX: MTY) franchises and operates quick-service and casual dining restaurants under over 80 different banners in Canada, the United States and internationally. At the end of the second quarter, the company reported a total network of 7,236 locations in operation, of which 137 were corporate, 7,077 were franchised, and 22 were in joint ventures.

Key Highlights:

Product Innovation to drive growth: With the gradual re-opening of the restaurants and food outlets, the company is emphasizing on product innovations, in order to adapt to the new demand dynamics. The management mentioned that it would regain the customer confidence upon its brands and would restore the positive momentum in order to enhance traction. Higher customer-traffic is likely to support future sales volume of the company and subsequently the company’s income.

Improved Financial Flexibility: The company reported a higher cash flow from operation of CAD 38.6 million, as compared to CAD 27.2 million in the previous corresponding period (pcp), driven by the positive variance in income taxes paid and to strict working capital management to preserve liquidities. Furthermore, the company repaid ~CAD 38.0 million of its long-term debt, which is likely to result in lower finance costs.

Q3FY20 Key Takeaways:

• The company posted a lower Q3FY20 revenue of CAD 135.366 million, as compared to CAD 161.290 million in the previous corresponding period. The decline was primarily due to a temporary shut-down of several stores on account of restrictions imposed due to COVID 19 pandemic.
• The company impresses with the operating performance by posting a higher adjusted EBITDA of CAD 43.388 million, as compared to CAD 41.847 million in Q3FY19. The improvement was primarily contributed by the strong performance of several brands including two largest, Cold Stone Creamery and Papa Murphy's, followed by a reduction of recurring controllable expenses through tight cash management. 
• The company’s net income stood at CAD 22.932 million, at par with the company’s previous year’s bottom-line of CAD 22.902 million.
• The group reported a cash balance of CAD 43.8 million, while long-term-debt was reported at CAD 496.2 million.

Q3FY20 Financial Highlights (Source: Company Reports)

Risk: The second wave of the novel virus might result in restaurant closure, which would hamper the financial performance of the group. 

Valuation Methodology: Price to Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:  As the group reported a gradual re-opening of restaurants and food-service segments, the stock of MTY soared ~29% and ~58% in the last three months and six-months, respectively. We believe the economy is on the verge of recovery, and we expect an improved demand for the company’s offerings driven by improvement in consumer spending. We have valued the stock using Price to Earnings value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered industry (Hotel & Entertainment Services) median on NTM basis. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 37.94 on October 30, 2020.

MTY Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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