RFG - Retail Food Group

[ROE]

if only life were that simple!!

My life is simple, it just my investment that give me headache and confusion every so often

 

[Wysiwyg]

However my share purchase came about with the formation of what appears to be a symmetrical triangle pattern. Price today bumping up against resistance at the upper line.

Another sell wayyy too soon at $6.28. Starting to pee me right off. The ASX surge has continued to sweep many stocks along. RFG breakout update.

 

[ROE]

Another year another dividend increase many times better than inflation, it is its 17th times bi-annual increase back to sleep and collect more divi

 

[galumay]

Another year another dividend increase many times better than inflation, it is its 17th times bi-annual increase back to sleep and collect more divi

Yes, this company is turning into the star of my SMSF, very impressed.

 

[TPI]

Any thoughts on the latest strategic update?

I thought it was good, though the market disagreed!

Focus on quality of network rather than an over-sized network.

Consolidate acquisitions, cut losses and rationalise under-performing areas.

Coming clean early on where things haven't quite gone to plan and taking immediate action seems like good management to me.

And international expansion, through JVs or similar lower-risk avenues.

Along with a management restructure to give appropriate attention to the different parts of the business, with additional non-executive directors being added soon.

Seems like a good strategy to me given tough domestic retail conditions and the AUD dollar.

Admittedly the share price got ahead of itself going to $8, but it's still well above the recent SPP price.

 

[ROE]

I think small cap just going through a mini correction, just another trough in the journey
keep calm, pocket dividend and eat Michel cake and drink Di Bella Coffee

I thought their market update is ok too, coffee is a good business and growing in popularity

they cant go much wrong expanding this market and take control, I drink from boutique coffee shop and Di Bella Coffee bean is pretty good, a few shop I drink from get their bean from Di Bella.

Keep going down a bit more and I get some shares for my kids

 

[TPI]

I think small cap just going through a mini correction, just another trough in the journey
keep calm, pocket dividend and eat Michel cake and drink Di Bella Coffee

I thought their market update is ok too, coffee is a good business and growing in popularity

they cant go much wrong expanding this market and take control, I drink from boutique coffee shop and Di Bella Coffee bean is pretty good, a few shop I drink from get their bean from Di Bella.

Keep going down a bit more and I get some shares for my kids

Thanks ROE, yeah still has a good dividend yield and dividend growth has been good historically.

 

[galumay]

Thanks ROE, yeah still has a good dividend yield and dividend growth has been good historically.

Also its well above the SPP price, I am sure we will see another spurt in price when it next reports!

 

[JTLP]

Was tempted to buy in but still seems to be getting hammered. Good yield though.

Was is the flat retail and declining food sales for April that are triggering this? Or a bigger player moving out?

 

[skc]

Was tempted to buy in but still seems to be getting hammered. Good yield though.

Was is the flat retail and declining food sales for April that are triggering this? Or a bigger player moving out?

I didn't read the annoncement in detail.. but my understanding is that there is an ~$18m write off associated with some stores and franchise operations. That's a meaningful chunk of full year NPAT and the market isn't sure whether it's a true one-off or it's representing something larger at play. Afterall, if things are swimmingly well, you don't do writedowns.

The odd failed Gloria Jane transaction (see a few posts back) is also at the back of my mind... may be there was something a bit funny??

I have been trading it on the short side pretty good in the last few days... but I think the selling is mostly done now.

 

[Ves]

I didn't read the annoncement in detail.. but my understanding is that there is an ~$18m write off associated with some stores and franchise operations. That's a meaningful chunk of full year NPAT and the market isn't sure whether it's a true one-off or it's representing something larger at play. Afterall, if things are swimmingly well, you don't do writedowns.

The odd failed Gloria Jane transaction (see a few posts back) is also at the back of my mind... may be there was something a bit funny??

I have been trading it on the short side pretty good in the last few days... but I think the selling is mostly done now.

Agree. The $18mil is write-off is suspicious and very poorly explained (actually a lot of their presentations are filled with jargon). I'm not sure how to read it. It seems like an admission that there is a lot of duplication in the company after the buying spree of the recentyears. There's a line of thought in my head along the lines of: It is OK to make an acquisition at its fair value (or less) but if it has some assets within it that you already have in your existing operations then it is almost undeniably worth less to you. Seems simple, but a lot of companies fail on this count.

Also in the presentation there is a very noticeable spike in store closures. Some as part of the acquisitions. Apparently this doesn't affect earnings, because there stores are at break-even. The big question is: when did they become break-even? Were they always break-even, or is this part of the earnings cycle (and new growth has so far covered the gap), and if it's part of the earnings cycle, and the economy gets worse, how many more under-performing / break-even / loss-making franchises will turn up? Franchise operators need scale to maintain high margins. If they're closing stores too often then fixed costs grow as a % of revenue and earnings slide very quickly. Maybe current earnings are closer to peak than a fair representation of the whole cycle.

Also thinking that initial growth overseas isn't as cheap as in Australia because you need to build a fixed cost base to run the business. They have some of it done. But I bet there's a lot more to do if they want to ramp up the franchise outlets. Failure is pretty costly as most businesses have found out.

Probably a bit more risk in the stock now, especially as there are many more moving parts. Looked like it was pushing the limitations of fair value at $7 any way. You'd need either a low required return or large amounts of profitable growth to arrive at that value.

 

[Wysiwyg]

Consumer discretionary (discretion :- choice, option, preference, disposition) stocks can be affected by economic circumstances. Cake and coffee might be a luxury for better employment and wage growth times. From a chart perspective, RFG was driven precisely to $8 before gradually deflating toward the last 3 days of steep decline. I read of "smart money" and though not convinced, this steep price decline looks like one of those induced share selloffs. There may be further bad news and good reason to get out but only time will reveal if this is so.

Previous significant support was at $5.33 (green line) which could (I don't know) be an area of support and a supply exhaustion happened at $5.37 on Friday before a buy up to $5.50 which could become resistance. Next supp. at $5.16 (lower green line). The weekly +19% price range down was in the top 5 highest of RFG's history.

 

[galumay]

From a fundamental viewpoint I think they ran well ahead of IV, the general fall in the market conspired with the concern about the future earnings and concern about write downs recently announced to bring the price back. As mntioned its still well above the recent SPP price and as long as the next update shows growth, revenue and earnings on track I would expect it to recover lost ground.

 

[McLovin]

Agree. The $18mil is write-off is suspicious and very poorly explained (actually a lot of their presentations are filled with jargon). I'm not sure how to read it. It seems like an admission that there is a lot of duplication in the company after the buying spree of the recentyears. There's a line of thought in my head along the lines of: It is OK to make an acquisition at its fair value (or less) but if it has some assets within it that you already have in your existing operations then it is almost undeniably worth less to you. Seems simple, but a lot of companies fail on this count.

Also in the presentation there is a very noticeable spike in store closures. Some as part of the acquisitions. Apparently this doesn't affect earnings, because there stores are at break-even. The big question is: when did they become break-even? Were they always break-even, or is this part of the earnings cycle (and new growth has so far covered the gap), and if it's part of the earnings cycle, and the economy gets worse, how many more under-performing / break-even / loss-making franchises will turn up? Franchise operators need scale to maintain high margins. If they're closing stores too often then fixed costs grow as a % of revenue and earnings slide very quickly. Maybe current earnings are closer to peak than a fair representation of the whole cycle.

Also thinking that initial growth overseas isn't as cheap as in Australia because you need to build a fixed cost base to run the business. They have some of it done. But I bet there's a lot more to do if they want to ramp up the franchise outlets. Failure is pretty costly as most businesses have found out.

Probably a bit more risk in the stock now, especially as there are many more moving parts. Looked like it was pushing the limitations of fair value at $7 any way. You'd need either a low required return or large amounts of profitable growth to arrive at that value.

Great post, Ves.

I'm finding it difficult to make top and tail of these guys. The growth seems to all be coming from new stores, excluding coffee which does seem to have some SSS growth. The store closures are an issue in this regard because without new stores revenue growth would be CPI at best. Having an $18m write off tucked away as a single bullet point on page 23 of a 28 pager is also a bit worrying. I don't really buy this whole international expansion, or more properly I wouldn't pay anything for their international expansion. Valuation wise it's not super expensive if it pulls in the $55m they claim they will this year and they can make big gains in GJs in the next few years, but at the same time it's not really cheap enough to get me interested to really dig deep.

I reckon their pizza business is getting killed by Dominos. DMP SSS for the half 10.6%, RFG QSR 1.2% (EBITDA/store is going backwards too). Remember that was going to be next big thing for them a few years ago?

 

[Ves]

Outside of the new acquisitions, the results of previously held franchise system results look very week to me. They're going backwards.

Management have been buying up to drive profit growth, but the balance sheet is starting to get a bit stretched (ie. they'll have to raise capital to continue buying up*).

I'm starting to think they have limited organic growth opportunities. Even the QSR buzz they were talking up seems to have come to a stand-still.

*As a side note, they are a serial diluter of retail holders every time they raise capital.

 

[Ves]

Forgot to disclose, I'm out as of this afternoon.

 

[McLovin]

Outside of the new acquisitions, the results of previously held franchise system results look very week to me. They're going backwards.

Management have been buying up to drive profit growth, but the balance sheet is starting to get a bit stretched (ie. they'll have to raise capital to continue buying up*).

I'm starting to think they have limited organic growth opportunities. Even the QSR buzz they were talking up seems to have come to a stand-still.

*As a side note, they are a serial diluter of retail holders every time they raise capital.

You pretty much wrote, verbatim, what I would have.

I'd also note that EPS growth was actually negative. What they called "Basic EPS" in their prezzo was actually underlying EPS with asset impairments and "brand realignment" (was it you Ves who said they like lofty language?) added into the mix EPS was 22.5c/share.

The debt is a bit of a concern to be honest, even more so when they talk about $70m in headroom, which leads me to think they're quite happy to keep using debt. Tangible assets are a handful of PP&E and WC.

Not one for me.

 

[Ves]

You pretty much wrote, verbatim, what I would have.

I'd also note that EPS growth was actually negative. What they called "Basic EPS" in their prezzo was actually underlying EPS with asset impairments and "brand realignment" (was it you Ves who said they like lofty language?) added into the mix EPS was 22.5c/share.

The debt is a bit of a concern to be honest, even more so when they talk about $70m in headroom, which leads me to think they're quite happy to keep using debt. Tangible assets are a handful of PP&E and WC.

Not one for me.

Yep, "brand realignment" and "restructuring" aren't one-off costs in these businesses. They are costs of doing business for franchise operators IMO. To add them back is a bit dishonest if you ask me.

Agree with your comments re the debt, they won't pay it down, this company listed on the ASX to build an empire of franchise systems, they certainly won't stop doing that. If anything it has been accelerating, which makes it really hard to find the real cash flow of the underlying business.

If they can't add organic outlet / franchise fee growth to their acquisitions then they aren't really creating any value for existing shareholders IMO.

The business model is much closer to something like GXL than I initially anticipated.

 

[galumay]

While I dont disagree with what you guys point out with their core business operations, the coffee division is exploding, if they can maintain that sort of growth maybe they will drop off the fast food stuff and just concentrate on coffee.

If they can really be a force in the Chinese coffee scene - which is simply exploding as the middle class develop a taste for it - then there is a lot of potential.

I am continuing to hold for the time being.

 

[finnsk]

This is good explanation why I think this is not a share to hold, don't think there is many franchises within Michell's Patisserie, Gloria Jeans etc there is making a good profit unless they are working 60-70 hours per week 52 weeks a year.

I Know of a franchise chain that have weekly fees of head office and advertising fees etc of more that 10%, it is like your broker charges 10% or more of your turnover not profit.

http://www.couriermail.com.au/news/...ning-a-franchise/story-fnihslxi-1227514066454