Recipe Unlimited Corporation (TSX: RECP) is a restaurant chain operator and has 1,363 restaurants across 24 brands. The Company’s 85% of the stores are operated by joint venture partners and franchisees in around 11 countries, and the Company derives revenue through royalty income.

The Company recently announced a CAD 35 million rent subsidy program to assist its franchise network with direct rent support through the end of FY20.

Q1FY20 Financial Highlights: RECP announced its quarterly results, wherein the company reported total gross revenue of CAD 269.9 million, significantly lower than CAD 304.6 million in pcp. The decline was majorly attributable to lower system sales on account of the Government restrictions of mandatory closure of non-essential services due to COVID 19 pandemic resulting in lower royalties. However, the Company's Retail and Catering divisions categorized as essential service and remained operational and provided groceries to the Customers. Operating EBITDA stood drastically lower at CAD 20.5 million, as compared to CAD 50.1 million in the previous corresponding period. The fall was majorly attributed to lower gross revenue coupled with food spoilage and employee termination costs within the corporate restaurants, which was partially offset by improved Retail and Catering sales. Operating EBITDA Margin on System Sales eroded to 2.7% against 5.9% in the previous corresponding quarter, due to the above-mentioned factors. The Group reported operating loss amounting to CAD 10.7 million, as compared to an operating profit of CAD 31.5 million in Q1FY19. Net loss, during the quarter, stood at CAD 41.2 million, as compared to a profit of CAD 22.7 million in the previous corresponding period.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of RECP corrected big time due to the closure of the dine-in option within the restaurant segment. The stock slumped ~59% in the last one year and underperforming the index by ~57%. The Management expects a sea change in the restaurant segment, as the restaurants are likely to be operated with lower seats to maintain social distancing in the post-lock-down. Consumer behavior is likely to be different due to lower discretionary spending available to the consumers. The group is emphasizing on tracing consumer demands and prioritizing on takeout and online categories. Further, the company has a grocery segment under the essential service category, which would support the cash flow of the company in the coming months. The group is also focusing on the closure of non-performing outlets and reducing its costs structure. We believe the group’s financial performance to remain under pressure in the near term. Further, the stock is trading at a forward P/E ratio of 28.6x against the Industry (Hotels and Entertainment Services) multiple of 25.1x.  Hence, we recommend a 'Watch' stance on the stock at the closing market price of CAD 10.97 as on June 12, 2020.

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

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