MTY Food 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. 

Q2FY20 Financial Highlights: MTY announced its second quarter results, wherein the group posted a lower revenue of CAD 97.808 million, as compared to CAD 125.571 million in the previous corresponding period (pcp). The decline was primarily attributed to a lower system sale on account of restaurant closures across most of the places due to COVID 19 pandemic. EBITDA, during the quarter, fell 47% on y-o-y basis to CAD 18.2 million. EBITDA margin declined to 18.6% as compared to 27.1% of sales in pcp. However, the company reported a 33% growth in free cash flows to CAD 28.9 million, underpinned by the refranchising of two groups of Papa Murphy's corporate locations during the quarter. Net loss, during the quarter stood at CAD 99.126 million as compared to a net profit of CAD 19.337 million in pcp.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: The operating environment of restaurant industry is likely to remain challenging in the near term because of the changes in customer consumption patterns. The company is also exposed to risks related to supply chain performance and growth strategies, its ability to mitigate the impacts of COVID-19, changes in consumer discretionary spending and eating habits, etc.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation:  The stock corrected ~31% so far this year due to a temporary closure of operations across Canada region on account of COVID 19 pandemic. The company is focusing on reopening its restaurants with proper safety measures and has reported a gradual reopening of restaurants. During the month of July 2020, the number of closed stores has come down to 573 locations, depicting 8% of the total stores, which is encouraging. In the short-term, the company is focused on re-opening the restaurants and is aiming to rebuild customer confidence by implementing proper safety measures. Although the Company doesn’t foresee sales comparability for at least the next 2-3 quarters, management believes that it will be able to regain customer confidence in the brands and restore the positive momentum. Further, to enhance the liquidity, MTY negotiated an amendment to its credit agreement with its syndicate of lenders for flexible financial covenants for the next four quarters, which is a prudent move. The Company has ample liquidity to mitigate the current situation while the business has delivered stable cash flows from operations, augurs well for the funding requirements.  Further, to support the near-term cash flows, the Company suspended its dividend payment program. The stock soared ~37% in the last three months and closed above the 200-days simple moving average of CAD 37.09, indicating a bullish pattern. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Premium Brands Holdings Corp., Sleep Country Canada Holdings Inc etc. Considering the aforesaid facts, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 38.42 on September 15, 2020.

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

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