Restaurant Brands International Inc.

Restaurant Brands International Inc. (TSX: QSR) is one of the world's leading quick-service restaurant companies with over 27,000 restaurants in more than 100 countries. The group operates through its well-established brands like TIM HORTONS or TH, BURGER KING or BK, and POPEYES or PLK.

Due to COVID-19 related restrictions across the globe, QSR opted for only delivery and drive-thru option in the recent past. However, with the gradual opening of the restrictions, the group has opted to open its 'dine-in' options. The group has acrylic shields and contactless service in the restaurants and maintaining a 'safe distance' rule. The group is taking care of hygiene and sanitization and turned off self-serve soda fountains and are offering beverages, extra condiments and trays from the behind the front counter.

Q1FY20 Financial Highlights: QSR reported a marginal slide in total revenues of US$ 1,225 million, as compared to US$ 1,266 million in Q1FY19. Due to the closure of 'dine-in' segment of the Company on account of ongoing restrictions, the top-line witnessed a slide. Income from operation stood at US$ 389 million, as compared to US$ 434 million in the previous corresponding quarter primarily attributable to the lower revenues, increase in the selling, general and administrative expenses, partly supported by a lower cost of sales and Franchise & property expenses. Net income stood at US$ 224 million, as compared to US$ 246 million in the previous corresponding quarter, due to a slight increase in total operating expenses followed by lower interest expense and a decline in income tax. The group reported cash and cash equivalent of US$ 2,498 million, while total assets stood at US$ 22,629 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: P/ CF Based Relative Valuation (Illustrative)

P/CF Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock corrected ~17% so far this year and due to the worldwide disruptions in business on account of COVID 19 crisis and shutdown of several franchises across the globe. QSR has opened up the dine-in services and offering contactless service at most of the outlets. The Company has taken a prudent step and scaled its digital capabilities, which includes adding hundreds of new restaurants onto delivery apps and improving the drive-thru experience. The Company made a major expansion within the mobile order & pay and has opted for the contactless guest experience. With the inclusion of the dine-in option along with the enhanced delivery option, we expect the Company to report an improved top-line and cash flows in the coming days. The group is offering a dividend yield of 3.8%, which is decent amid the lower interest rate environment. We have valued the stock using P/CF multiple based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Mcdonald's Corp, Chipotle Mexican Grill Inc, Yum! Brands Inc etc. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 75.97 on May 28, 2020.

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

H&R Real Estate Investment Trust

H&R Real Estate Investment Trust (TSX: HR.UN) is a real estate investment trust which owns and manages a real estate portfolio. The company has ownership of properties in the US and Canada. The major part of the revenue comes from Canadian real estate.

The company reported a lower rent collection of ~80% for May (as on May 14) compared to 85% in March, primarily attributable to lower rent collection from enclosed malls which fell from ~40% in April 2020 to ~30% in May 2020. Residential and Industrial segment also reported a decline in total rent collection. The Management has lowered its monthly distributions by 50% to CAD 0.0575 per common share, which will be payable on June 05, 2020.

Q1FY20 Financial Highlights: For the quarter ended March 31, 2020, HR.UN posted its revenue of CAD 279.7 million, lower from CAD 298.7 million from Q1FY19. Property operating income stood at CAD 140.6 million, against CAD 153.8 million in Q1FY19. Net loss stood at CAD 1,019.8 million, as compared to a loss of CAD 2 million in pcp, due to a significant loss in fair value adjustment on real estate assets, amounting CAD 1,301.24 million Funds from operations (FFO) remained flat at CAD 136.1 million against CAD 137 million in Q1FY19. NAV stood at CAD 22.26, reflecting a decline from CAD 25.89 in pcp. The company exited the period with total assets of CAD 13,443.96 million and cash and cash equivalent of CAD 52.75 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: EV/ EBITDA Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock of HR.UN corrected ~49% so far this year. The stock is currently trading at the lower band of its 52-weeks trading range of CAD 23.63 and CAD 7.39. The Company secured a CAD 425 million unsecured line of credit, which seems sufficient enough to support the group’s near-term requirement. Further, to preserve the cash flow, the group has postponed certain projects where the construction has not begun. The stock is offering a lucrative dividend yield of 6.43%, which is likely to appeal a large number income of investors. As the current situation stabilizes, we believe that group is likely to witness an improvement in rent collection in coming days owing to Government relaxation on several business activities and improved retail spending. The stock reacted positively in the last one month and reported a ~16% appreciation. We have valued the stock using EV/EBITDA multiple based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered Artis Real Estate Investment Trust (TSX: AX.UN), Crombie Real Estate Investment Trust (TSX: CRR) and Choice Properties Real Estate Investment Trust (CHP.UN) etc. as a peer group. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 10.55 on May 28, 2020.

HR.UN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.