The initial private offering (IPO) of fast food restaurant chain Craveable Brands is the next cab off the rank to float on the Australian Securities Exchange (ASX), and it is attracting plenty of interest, given that fast food is seen as a good defensive retail sector – when the broader retail market is shivering at the prospect of the entry of Amazon.
Against that, Craveable Brands is a private equity float – it is being sold by Archer Capital – and the share market is right to be wary of private equity exits.
In fact, one of the Craveable Brands numbers that investors will most focus on will be the proportion of Archer’s stake that it retains after the float – this will be somewhere between 30%–50%.
Craveable Brands has a network of 561 fast food restaurants in Australia and eight in New Zealand. The company operates the Red Rooster, Oporto and Chicken Treat chains: it is the master franchisor of the brands, which it owns. Red Rooster has about 360 restaurants, while Oporto operates about 160. Craveable Brands backs its restaurants with a central corporate operation handling intellectual property, restaurant operations, supply chain, franchising, IT, marketing, store design and construction, food innovation, and customer satisfaction.
Just under two-thirds of Craveable Brands’ sales come from Red Rooster, which generated $477 million in revenue in the 2015-16 financial year. The company believes home delivery – which currently represents 10% of Red Rooster’s sales – is its major growth area: it reckons it can boost that proportion to the kind of levels that Domino’s Pizza has, at about 50%.
The company will complete its management roadshow on Monday. Then sponsoring brokers Goldman Sachs and Morgan Stanley will conduct the institutional bookbuild on Wednesday (June 27), with the shares expected to start trading on July 12.
At this point, investors don’t know the price they will be asked to pay for Craveable Brands. They know the indicative price range is between $2.09 and $3.07 a share – which would value the company at between $368.7 million and $400.8 million – but the institutions will determine the actual offer price.
Fast food has been in the news on the ASX lately.
Just yesterday, fast food chain Oliver’s Real Foods (OLI) made a promising debut on the market, closing its first day of trade at 24 cents, up 20% on the company’s IPO price of 20 cents a share. But the caveat there is that Oliver’s and its brokers initially wanted 30 cents a share: the price was lowered to 20 cents to get institutional investors into the float.
Also this week, listed fast food and coffee group Retail Food Group (RFG) brought out a profit downgrade that surprised the market, and saw 10% cut from its market value. RFG owns Michel’s Patisserie, Gloria Jean’s Coffees, Donut King, Brumby’s Bakery, Pizza Capers and Crust Gourmet Pizza. RFG had expected to lift FY17 net profit by 20%, but now says the expected increase will be more like 15%.
Exact comparisons with Craveable Brands are difficult, especially in the absence of a final IPO price. Goldman Sachs analysts have used Collins Foods, which is a KFC franchisee, operating KFC and Sizzler outlets in Australia and parts of Asia. It’s not an apples-with-apples comparison, because Craveable Brands owns its brands, and is a franchisor.
Oliver’s is not an accurate comparison with Craveable Brands: it is a specialist fully organic fast food chain (it says it is the world’s first such chain) that has outlets in highway service centres along the east coast.
Nor is Retail Food Group, because coffee represents about 42% of its total earnings.
And nor is Domino’s Pizza – it is virtually seen as a technology-enabled global growth stock. The company has upgraded its FY17 full-year earnings forecast twice, and now expects net profit and underlying earnings to increase by 32.5%, after a strong first-half performance.
Nevertheless, according to FN Arena:
- Collins Foods trades on 13.1 expected FY18 earnings
- The Retail Food Group trades on 9.4 times expected FY18 earnings
- Domino’s Pizza trades on 31.6 times expected FY18 earnings
And according to its prospectus, Oliver’s Real Foods – which forecast a loss on FY17 – trades (at 24 cents) at 14 times expected FY18 earnings.
The indicative price range given for Craveable Brands equates to a value between 11.5 and 12.5 times forecast earnings.
The company expects to make EBITDA (earnings before interest, tax, depreciation and amortisation) of $46.4 million in the year to June 2017, and boost that to $52.5 million in the 2018 financial year, on sales of $786 million.
Based on the estimates of the analysts at the sponsoring brokers, the stock is expected to offer a dividend yield of up to 9%, unfranked, which is the equivalent of a 6.3% fully franked yield.
In comparison, estimates collated by FN Arena indicate that analysts expect Collins Foods to pay a dividend yield of 3.3% in FY18, Retail Food Group to pay 7.1% (value augmented by its recent share price slump: yields move inversely to share prices) and Domino’s Pizza to pay 2.4%.
Because of previous losses, Craveable is not expected to start paying tax until 2019: once the company begins paying tax, and can frank its dividends, its yield would be expected to fall.
Craveable Brands’ growth strategy revolves around expanding its delivery offering, rolling out new restaurants – Goldman Sachs says the company has identified about 240 potential locations for new network restaurants, and is targeting at least 10 new net restaurants a year in the medium term – and international master franchise agreements.
Craveable Brands is a high-quality operation, and could be a strong IPO – but it all depends on how pragmatic Archer Capital and its brokers are prepared to be in pricing the stock. The institutional pressure that caused Oliver’s Real Foods to drop its asking price will also come to bear on Craveable Brands, but it has a wide indicative range to play with. We expect a final price to be closer to the lower end of the indicative range than the higher end: the closer to $2.09, the better. We also want to see Archer’s retained stake as high as possible, to give shareholder comfort that the vendor is keeping significant skin in the game.
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