Recipe Unlimited Corporation – Suspended Dividend to Conserve Cash During the Pandemic

Recipe Unlimited Corporation (TSX: RECP) is a restaurant chain operator. It was established in 1883 and presently (as at March 29, 2020), the Company has 1,363 restaurants across 24 brands, while 85 per cent of which are operated by joint venture partners and franchisees in around 11 countries.

Recent News

7^th May 2020: The Company suspended its dividend payment for the remainder of the financial year 2020, to conserve cash flow during the uncertainties presented by COVID-19 outbreak.

Trading Update (for the 13 weeks ended March 29, 2020)

 (Source: Company Website)

As on 7^th May 2020, the Company reported its first quarter FY20 update and reported the impact of COVID-19 led restrictions over the business. As 42 per cent of its restaurants remained completely closed since mid-March, the total gross revenue declined to CAD 269.9 million in Q1 FY20 from CAD 304.6 million in Q1 FY2019, reflecting a decrease of 12.9 per cent. Operating EBITDA plunged 59.1 per cent to CAD 20.5 million in Q1 FY20 from CAD 50.1 million in Q1 FY19. The impact of restaurant closing was partially offset by the sales growth in Retail and Catering segment. Eventually, the Company reported a net loss of CAD 41.2 million in Q1 FY20 from the net profit of CAD 22.7 million in Q1 FY19. Regarding liquidity, the Group reported a withdrawal of CAD 300 million through revolving credit facility on 17^th March 2020. Besides trading, the Group has closed its central office facility and adopted work from home protocols, in response to COVID-19.

Share Price Performance

 Daily Chart as on 20 May 2020, (Source: Refinitiv, Thomson Reuters)

RECP’s shares are trading at CAD 9.70 on 20 May 2020. Stock's 52 weeks High is CAD 27.71 and Low is CAD 7.47.

From the technical standpoint, its shares were trading well below its short-term support level of 20-day simple moving average price, which reflects a downward in the stock and carrying the potential to move down further

 Conclusion

The medium to long term impact would depend on the longevity of restaurant closing. Even after the lockdown easing, consumer demand would need substantial time to revive. Currently, the management is unable to quantify the impact of COVID-19 over the business in terms of guidance. The restaurant industry is expected to be different, even post lockdown scenario with lesser capacity and volume. Moreover, the overall Canadian restaurant industry is quite competitive in terms of pricing, quality, service, and location. Moreover, the Company’s future sales are also dependent on the disposable income of consumers, economic conditions, and consumer confidence. However, the Group has adopted several liquidity measures and suspended the dividends for the remaining of the financial year 2020. Meanwhile, the Group has decided to exit and permanently close the underperforming restaurants, while expanding the retail and off-premise business through other brands. Furthermore, the Group has amended debt covenants sufficiently for the near future. On other hand, the Group’s retail segment has been resilient through grocery sales.

Based on the above rationale, we have given a “Watch” recommendation at the current price of CAD 9.70 (as on 20 May 2020), while we look for any upcoming catalysts in the near term.

Disclaimer

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