Innovative Offerings Leads to Higher Demand:  Pizza Pizza Royalty Corp. operates in a quick-service restaurant (QSR) business and offers pizzas and other food items to its consumers. The company derives its royalty income from 772 restaurant outlets.

PZA announced a monthly cash dividend of CAD 0.0713 per share. Meanwhile, in FY19, the dividend payout ratio stood at 103%, as compared to 104% in FY18.

During FY19, the company opened 11 new traditional pizza restaurants across British Columbia, Quebec and in Ontario while closed 11 outlets.

Q4FY19 Financial Highlights: For the quarter ended December 31, 2019, PZA posted system sales of CAD 146.9 million, reflecting a growth of 3.8% on y-o-y basis. The increase was driven by contribution from newly added outlets and rise in sam- store-sales growth (SSSG). The quarter was marked by 2% growth in SSSG on account of change in price-mix while customer traffic remained a drag. Royalty income stood higher at CAD 9.54 million, improved from CAD 9.19 million in the previous corresponding period, thanks to the higher total system sales. Adjusted earnings available for the shareholders stood at CAD 5.56 million, as compared to CAD 5.32 million in Q4FY18, thanks to lower interest cost and lower administrative expense.

Q4FY19 Income Statement Highlights (Source: Company Reports) 

Valuation Methodology: P/E Based Relative Valuation

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation: The stock of PZA is trading at CAD 7.16 with a market capitalization of CAD 176.56 million. The stock corrected by 26.71% and 28.32% in the last six months and nine months, respectively. The stock made a sharp recovery and generated a 4.75% return in the last five trading sessions, outperforming the index by 6.89%. The recent fall in prices has inflated its dividend yield to 11.95%. During Q4FY19, the company reported decent sales growth across both the brands through the introduction of new products and relaunch of website and app. The group further targeting to enhance customer traffic by offering ‘value for money’ products. The company falls under the quick service restaurant (QSR) category, and the sector is characterized by easy entry option, which resulted in a ‘price competitive’ scenario. Despite a competitive market, PZA has retained its margin through closing the non-profitable outlets and lowering administrative expenses. Considering the aforesaid fact, we have valued the company using Price to Earnings based relative valuation methodology and used F12 months industry (Hotels & Entertainment Services) average and arrived at a target price of double-digit upside (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 7.16 as on April 2, 2020.

PZA One-Year Daily Price Chart (Source: Thomson Reuters)

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