Robusta fundamental, leveraged investments

[McLovin]

I saw on the RM blog that he is going to start a retail fund. Any takers? Skc? Robusta? McLovin?...........................perhaps Craft?

craft is the number one ticket holder at RM Co.

 

[Ves]

craft is the number one ticket holder at RM Co.

Yeah, he got offered a job there, didn't you hear? That's why he hasn't been posting? :

 

[tinhat]

Curious, do you know what pay-out ratio and forecast dividend for 2012? I looked at this stock late last year, but have found better opportunities so far. Looks interesting still. Another profit downgrade and it could be under $1.

Reuters Thompson consensus forecasts (four analysts):

2012
EPS 19.3c
Dividend 5cps (no franking credits)


2013
EPS 19.7c
Dividend 9c (no franking credits)

Works out to a yield of 8.53% at today's close of $1.055

 

[craft]

craft is the number one ticket holder at RM Co.

Yeah, he got offered a job there, didn't you hear? That's why he hasn't been posting? :

You guys trying to bait me.

Current job is real cushy and the boss is freakin awesome – can’t see me ever working for a sales Muppet. Besides Muppets don’t hire people who call them Muppets – it’s bad for their image and when you don’t have substance, image is everything.

 

[robusta]

Is there any hurry to pick up the stock? All it's technical indicators are still pointing downward in circumstances where the fundamentals don't appear to be capable of a quick about-face in the current macro economic environment.

Or am I missing something?

Why now?

Very simple answer, the market offered me a price I was prepared to pay.

Don't know anything about technical indicators or quick changes in the macro economic environment but if I am offered a price ten percent plus cheaper I may consider adding to the position.

 

[Ves]

Reuters Thompson consensus forecasts (four analysts):

2012
EPS 19.3c
Dividend 5cps (no franking credits)


2013
EPS 19.7c
Dividend 9c (no franking credits)

Works out to a yield of 8.53% at today's close of $1.055

Interestingly, that is a P/E of between 5 and 6 if those numbers are realised. They will pay out fully franked dividends when they have paid more tax and built up the franking account, I assume.

 

[McLovin]

Interestingly, that is a P/E of between 5 and 6 if those numbers are realised. They will pay out fully franked dividends when they have paid more tax and built up the franking account, I assume.

Which is about where I said I'd become interested. I have been looking at it over the last couple of week but I just don't like the fact that they are still revising down their sales numbers.

 

[Ves]

Which is about where I said I'd become interested. I have been looking at it over the last couple of week but I just don't like the fact that they are still revising down their sales numbers.

I agree - and without looking at financials, if you take a margin for error of about 20% for the forecast earnings per share you get around 15.5eps.

Multiply this by a preferrential P/E 5 and you get $0.775. By 6 and you get $0.93.

Pure back of the envelop type stuff and shouldn't be taken for real business analysis, but you get the picture. I think at these levels it would definitely be worth an in-depth look, despite the seemingly poor management, it should at least grow at inflation unless they do something catastrophically wrong (like take on massive amounts of debt and go on a dillutive acquisition binge).

Certainly wouldn't through large amounts of money at it in event.

 

[robusta]

Just a question on the profit downgrades, does anyone think this is permanent or cyclical?

My money is obviously on the latter.

 

[McLovin]

Just a question on the profit downgrades, does anyone think this is permanent or cyclical?

My money is obviously on the latter.

Cylical, IMO. I spoke to a guy who sells franchises a few months ago. He told me KFC, Dominos and McDs are the only franchises that are making more than "buying a wage" for their franchisees.

The only thing that I worry about in holding out is the Polous family have already shown they have an interest, if this sucker keeps going down they might take the thing out.

 

[Ves]

Reuters Thompson consensus forecasts (four analysts):

2012
EPS 19.3c
Dividend 5cps (no franking credits)


2013
EPS 19.7c
Dividend 9c (no franking credits)

Works out to a yield of 8.53% at today's close of $1.055

I actually had a bit of a read of the prospectus this afternoon.

They anticipate to pay out 50% of earnings and it will be a fully-franked dividend.

 

[craft]

I can see the value in KFC not so sure about sizzler. Problem I have with CKF is its financial structure, it only takes 1 bad cycle to wipe out an ownership structure and all future earnings go to somebody else.

NTA are way less then bank debt. Of those NTA’s a large proportion are leasehold improvements which are worthless out of context. They don’t own their own property so they have a large fixed cost in operating leases and I have no idea if royalties are fixed or variable or some combination.

Banks are already skittish and it wouldn’t take much to make that situation worse. What are the loan covenants, when are the loans due to be rolled?

Labour and property utilisation must suffer with declining revenue and I would imagine food wastage would be more of an issue if sales aren’t predictable. Management don’t have much control over the major costs or the macro factors that drive revenue. Junk food is discretionary and competition (Mc Donalds) has huge ability to squeeze margin in tight market if they wish.

If they can’t pay their interest on the Bank debt of 105Million after paying the operating leases and other fixed costs that they are exposed to, then well it’s not pretty.

Then there’s the little issue of deprecation n vs Capital spend mainly on lease improvements to keep the offering fresh, lots of scope to manage an accounting number here that may vary from the economic reality – for a while, but it won’t help cash flow over time and cash pays bills.

P/E is immaterial. Wake me when there is some certainty about revenue recovering or the balance sheet is fixed – one of the two has to happen, if it’s the latter and its left too long, it may not be possible or require massive dilution.

Probably not the sort of stock I would buy with LOC funds unless you are sure about an imminent rebound in revenue. This one whilst having good upside potential with so much leverage in the financial structure also has real risks of permanent loss of capital.

 

[skc]

Then there’s the little issue of deprecation n vs Capital spend mainly on lease improvements to keep the offering fresh, lots of scope to manage an accounting number here that may vary from the economic reality – for a while, but it won’t help cash flow over time and cash pays bills.

P/E is immaterial. Wake me when there is some certainty about revenue recovering or the balance sheet is fixed – one of the two has to happen, if it’s the latter and its left too long, it may not be possible or require massive dilution.

Probably not the sort of stock I would buy with LOC funds unless you are sure about an imminent rebound in revenue. This one whilst having good upside potential with so much leverage in the financial structure also has real risks of permanent loss of capital.

I am with you there Craft. The balance sheet looks as unhealthy as a fried chicken diet. My on the CKF thread
https://www.aussiestockforums.com/forums/showthread.php?t=23212&p=701823&viewfull=1#post701823

Not a completely hopeless turnaround candidate, but not yet fundamentally imo.
And a general rule of thumb for me... buy low PE when the E is going up (and consequently pushes the P up to restore a more normal PE), rather than a situation where P is falling faster than E (which can result in a more normal PE being restored by E falling further).

 

[Ves]

Thanks craft - great summary of the issues to look out for in the annual report for those interested (or already holding).

edit: As the old adage goes, the franchisor makes more money than the franchisee.

 

[McLovin]

Thanks craft and skc.

I think I've been a bit lazy on this one, need to do a lot more research.

 

[So_Cynical]

edit: As the old adage goes, the franchisor makes more money than the franchisee.

I've never heard of a franchisor that was successful selling franchise's that didn't make franchisees money.

Yes i know there are some franchisees (Wendy's some pizzas) that have been unsuccessful, but that's at the margins...Collins is a 43 year old business.

 

[Ves]

I've never heard of a franchisor that was successful selling franchise's that didn't make franchisees money.

The commercial world is littered with franchises that are sold to people with promises of riches. Yet the reality is that in most cases you do not earn enough to justify the initial investment. Most franchises require a lot of toil, a large upfront capital injection (and ongoing royalties and license fees) for slightly better, and in some cases the exactly the same result as they could achieve by working for a wage. McLovin named the ones where you may hope to do better than this. Of course, you still make a living and there is the comfort of a proven idea, but buying a franchise means that you will certainly not have the margins, high ROE and therefore higher profitability of the franchisor. Why would a franchisor sell you their idea and pass on their profitability at the same time?

edit: Yum Brands current figures indicate that they have a return on equity of 70% and a return on capital of 30%. You cannot seriously be telling me that if you bought a KFC franchise off them that you'd achieve the same results?

 

[McLovin]

The commercial world is littered with franchises that are sold to people with promises of riches. Yet the reality is that in most cases you do not earn enough to justify the initial investment. Most franchises require a lot of toil, a large upfront capital injection (and ongoing royalties and license fees) for slightly better, and in some cases the exactly the same result as they could achieve by working for a wage.

Just check out Yum!'s (any spelling experts know how to treat that possesive apostrophe with the exclaimation mark?) RoE. It's over 100%.

ETA: I missed your ETA about Yum!, my numbers were a bit over. Yours are correct.

 

[Ves]

Just check out Yum!'s (any spelling experts know how to treat that possesive apostrophe with the exclaimation mark?) RoE. It's over 100%.

Yup, see my edit. It's actually lower than it once was. But they are still growing at a rapid rate. You can barely notice the GFC blip on their stock price chart. It's a damn shame Australia doesn't have the scope to have big international franchise businesses like these of our own.

I am actually surprised by the amount of debt that Yum has on their balance sheet. I guess their cash flow well and truly covers it, so they can afford to leverage to the hilt.

 

[CanOz]

The bulk of Yum's growth is coming from China. They're adding a new store here every 22 hours. It's an amazing business, with the stores retailing a variety of healthy, tasty, local favors.

CanOz
Btw, only a tiny fraction of their stores are franchised. They own 95+% of their stores in China.