Collins Food - steady grower in competitive business QSR

 COLLINS FOODS FY24

Understandable business

The business operates KFC franchisees in Australia, Europe specifically, Netherlands, and Germany.

CKF also operates 27 Taco Bell restaurants in Australia that I will largely ignore due to their low profitability and size.

CKF operates 280 stores in Australia, this compares, for example, to Dominoes with 901 stores. Part of the difference is due to CKF being a franchisee while DMP owns the franchise and operates the franchisee network as the operator. DMP also has company stores.  A total of 760 KFC stores operate in Australia giving CKF a 37% share. DMP is more heavily saturated. There is also an opportunity for CKF to buy more stores. Ckf is more capital-intensive as it owns its stores.

In Europe, CKF operates 75 stores which looks to be 26% of the total stores. KFC looks to be underpenetrated in Europe compared to other QSRs.

The relationship with Yum Brands (the brand owner) is to be noted but is not unusual in QSR. YUM can set the menu prices and also assist with marketing campaigns. The reliance of the franchisee on the brand owner adds a layer of complexity and operational difficulty compared to owning the brand.

The main categories of QSR are hamburgers, pizza and fried chicken plus various local variations. The ability to compete depends on menu innovation, sales execution and the ability to keep costs low. Much of the business appears to be fought at low price levels so variations in commodity inputs per product can make a difference. That adds to the cyclicality of returns.

The main metrics are same-store sales (SSS), margin stability or growth and the ability to roll out stores (6% 5y cagr). Nimble and effective management of the competitive dynamic is important in QSR



Operating History

Revenue cagr over 5y rolls have been 11-135 but EPS (excluding the C19 roll) has been 6-10%. This shows a deterioration over the time frame in conversion to profitability.

The profitability metrics are very stable with GM 5Y average of 51.3% with high stability, ebit margin being 8.2-10% and agin very stable. EPS stability is 0.75 which is passable. The negative is an NPAT margin of 4.3% over the last 8 years and a tight band of 3.7-4.7%.

SHF has increased by 4-8% 5y cagr and reinvestment around 50%. 8Y ROE has averaged 12% with lows and highs of 9.6-14%.

CKF FCF is strong and covers reported profits. The reinvestment of CFO into PPE is 43% which is ok but not great.

These figures point to a solid but slow grower, reasonably predictable but the returns are not that attractive probably due to the capital intensity and the competitive environment of QSR. Since the company runs company-owned stores it does not have the super returning opportunity of franchising where the franchisee wears the capital costs.

 

Management

LT Incentives appear to be based around an eps growth measure and a relative TSR. The eps measure allocates 505 of the allocation at 11% eps with a range of 5-16% 3Y cagr.

The incentive is split 50/50 eps growth and rTSR.

CKF lost their CEO due to personal reasons and is yet to appoint a new CEO. Kevin Perkins board member and CEO from 1985-2013 is interim CEO. The board looks to have a wide experience.

The company has allocated capital to European businesses (the Netherlands and Germany). It is too early to draw any firm conclusions so far.

Balance Sheet

The current balance sheet is very sound and past acquisitions have increased debt which the company has paid down reasonably rapidly due to its FCF generation.

Currently, ND/equity is 39% and IC is 3X. Sound.

Other

The accounts are reasonably straightforward but exhibit some capital intensity.

The historic PE has been 27X, with a 9 std deviation. The McNiven is low, at 12X due to low ROE and low reinvestment 48%.

Despite the LT stability of earnings the market does emphasis sss and the share price can move significantly on the back of changes in sss.

The market is also weary of more capital being deployed into Europe which is doing ok so far but far from proven.

CONCLUSION - VALUATION

CKF looks like a solid steady grower but not that fast. Assuming a PE of 18X as an attractive entry level, with an assumed eps growth of 10% pa gives a 10% IRR at $9.20.

Purchasing it below this level is reasonable, but it has limited ability to engineer strong eps over time so may be a good place to park capital and earn reasonable returns rather than generate large returns.

Possible switch when an appropriate opportunity arises.

 

 

Please note the disclaimer.

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