Why Restaurant Brands International Is Worth $70

by Trefis Team
Restaurant Brands International Inc.
Rate   |   votes   |   Share

Restaurant Brands International (NYSE: QSR) has had a mixed first half of FY 2018, reporting upbeat earnings in the first quarter, but missing on consensus expectations on revenue in the second. The company has in the past laid down its list of priorities for FY 2018, which included improving comps for TH, building momentum behind BK, and accelerating restaurant growth for Popeyes Louisiana Kitchen (PLK). While it has made good progress on the latter two, any meaningful progress in the former is lacking as of now. However, its plans to revitalize the business should begin to show results in the near future. We expect the expansion of BK and PLK to be the key growth drivers in the near-term, with improvement expected for its TH segment.

We have a $70 price estimate for Restaurant Brands International, which is higher than the current market price. The charts have been made using our new, interactive platform. The various driver assumptions can be modified by clicking here for our interactive dashboard on Our Outlook For Restaurant Brands International In FY 2019, to gauge their impact on the earnings and price per share metrics.

We have arrived at a $70 price estimate for Restaurant Brands International based on revenue projections of $5.7 billion for FY 2019, net income of $1.4 billion, a P/E multiple of 24.7, and a share count of 477.4 million. The market price stood at $58.50 as of October 1, 2018, implying our price estimate is higher by 19%.

The revenue and net income margin forecasts have been based on the following factors:

1. “Winning Together” Plan: RBI detailed this plan during the first quarter earnings call webcast, through which it intends to improve the performance of TH and drive franchisee profitability. This plan focuses on “restaurant experience, product excellence, and brand communications” and is intended to stave off the negative press it has been receiving in the wake of the company’s issues with a group of dissident franchise owners. Resolving the issues with TH franchisees is critical for RBI’s future growth. Any growth in this segment in the future can be expected to come from international markets. In 2017, the company opened its first Tim Hortons restaurants in each of Asia, Europe, and Latin America, and has plans for additional openings in 2018 and 2019.

2. Expansion of Burger King: RBI is focused on expanding its Burger King chain and is entering into several franchisee agreements to fulfill this goal. The company has announced a financial agreement with private equity giant Bridgepoint to expand in the U.K. This agreement was followed by a master franchise agreement with Nexus Point in Taiwan and another master franchise agreement to expand its presence in the Netherlands. In Q2, the company grew its restaurant count by roughly 6.5% year-on-year, which reflects continued growth from its partners all around the world. Faster growth of the Burger King chain can become a key driver of revenues for RBI.

3. Implementing Delivery: RBI began testing delivery for BK in the U.S. in the first quarter across several hundred restaurants and numerous markets. This strategy follows from the successful model seen in many of its international markets, including China and Spain. The company is also testing delivery for PLK in the U.S., and currently has several hundred restaurants in various markets across the country that are participating in the test.

4. Prospects of Popeyes Louisiana Kitchen: Revenue growth from this segment can be expected to come from a higher number of its restaurants. In Q2, the company had a net restaurant growth of nearly 8%, helping in achieving system-wide sales of 11%. The company has also signed a master franchise agreement for expansion in Brazil, which calls for opening 300 restaurants in the country over the next ten years.

5. Tim Hortons’ Poor Results In The U.S.: While comps improved for TH sequentially in Q2, there is still plenty of work to be done. The global comparable sales were flat, reflecting Canada comparable sales of 0.3%, offset by continued softness in the U.S.  Given the fact that, in general in Canada, the breakfast items are the fastest growing products sold even in the day, TH launched ‘Breakfast Anytime,’ in contrast with previously, when breakfast items were only sold till noon. This was done based on research conducted by the company, the results of which showed that this program appealed to roughly 75% of respondents and 60% of TH’s guests indicated they would likely buy a breakfast sandwich after 12 noon. Moreover, one-third of the guests indicated their frequency of visits would increase post the implementation of the program. Since this was commenced in July, it should begin to show results in the forthcoming quarters.

6. Expansion of TH in China:  QSR entered into a Master Franchise Joint Venture agreement with Cartesian Capital Group to develop and open over 1,500 Tim Hortons restaurants throughout China over the next decade. This represents a tremendous opportunity for growth for TH.

7. Higher Tax Rate: As a result of the implementation of the new Tax Act and due to a benefit from stock option exercises, the effective tax rate fell to -12.1% in FY 2017. In FY 2018 and FY 2019, we expect the metric to increase to 8.4% and 10.4%, respectively, which will pressure the net income margin. On the other hand, improving EBITDA margin in FY 2019, as a result of cost reductions, should help to offset this pressure next year.

See Our Complete Analysis For Restaurant Brands International


What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs

For CFOs and Finance Teams | Product, R&D, and Marketing Teams

More Trefis Research

Like our charts? Explore example interactive dashboards and create your own.

Rate   |   votes   |   Share


Name (Required)
Email (Required, but never displayed)
Be the first to comment!