Sue Mitchell
August 29, 2017
AFR
Retail Food Group is facing its weakest profit growth in five years as intense competition in fast food and coffee retailing in Australia counters international growth.
New managing director Andre Nell expects underlying net profit to rise about 6 per cent in 2018 as solid growth from international and commercial businesses augments “modest” gains from domestic brands such as Michel’s Patisserie, Brumby’s, Pizza Capers, Crust Pizza, Donut King and Gloria Jeans.
The guidance implies an underlying net profit of $80 million, slightly below consensus around $82 million, prompting analysts and investors to trim 2018 forecasts.
RFG’s net profit rose 17 per cent to $61.9 million in 2017, buoyed by the $88 million acquisition of food maker and distributor Hudson Pacific and a food service business last August.
Underlying net profit, excluding one-off costs, rose 14 per cent to $75.7 million, falling slightly short of revised guidance around 15 per cent and consensus of $76.5 million.
The group booked about $18.3 million in transaction and restructuring costs and asset impairments in 2017 after similar one-off costs in 2016.
Group sales rose 27 per cent to $349.3 million, underpinned by acquisitions, 0.9 per cent same-store sales growth in Australia and a 1.8 per cent increase in average order value. Network sales in Australia fell 6.4 per cent to $855.9 million.
The number of new outlets shrank by a net 14, compared with net outlet growth of 84 in 2016, after 45 Michel’s Patisserie and Pizza Capers stores were closed.
However, RFG granted 15 new international licences overseas, taking the number of international territories to 81.
Accelerating expansion
RFG also recently reached agreement with UAE-based Al Hathboor and HKO groups to establish joint ventures to accelerate system expansion and build a network of coffee outlets in the Middle East and North Africa.
“Global licence activity not only provides immediate short-term benefits on the grant of a new licence, importantly, it also contributes to building recurrent revenue streams which increase as international territories grow their outlet footprint, providing a strong platform for increased royalty and product supply earnings,” said Mr Nell.
Earnings from the core franchise businesses in Australia were flat at $78.1 million, while earnings from international franchise and coffee operations rose 7.5 per cent to $19.4 million.
Coffee wholesaling profits were also flat at $14.2 million, while the group booked $11.8 million in earnings from its new commercial division, which was established in 2017 after the $88 million acquisition of food maker and distributor Hudson Pacific and foodservice businesses.
RFG restated earnings for 2016 and 2015 after reviewing accounting policies for intangible assets, acquisition costs and marketing funds.
RFG is among the market’s top 10 shorted stocks, according to shortman.com.au, with short interest jumping from 2.5 per cent in November to 12.4 per cent this month.
Underwhelming guidance
Despite the underwhelming guidance, RFG shares closed up 4¢ at $4.84, taking losses this year to 26 per cent.
“They already had a mild downgrade and the fact they came out with a set of numbers roughly in line with what they had led the market to expect meant that there were not many people left to sell and the shorts potentially covered a bit,” said Pengana Capital senior fund manager Ed Prendergast.
“The stock has been sold down pretty aggressively and on all measures is quite cheap.”
One analyst said that while the Australian franchise operations were mixed, there were pockets of encouraging growth, pointing to 4.7 per cent same-store sales growth at Donut King.
“That shows if you get the product right and the messaging right you can grow,” the analyst said.
“That shows they haven’t got it right at Michel’s in particular [where same-store sales fell 2 per cent] and that there’s improvement potential in Gloria Jeans and Brumby’s.”
RFG increased its final dividend by 0.5¢ to 15¢ a share, payable October 17, taking the full-year payout to 29.75¢.
Follow us: @FinancialReview on Twitter | financialreview on Facebook
Subscribe to our free mailing list and always be the first to receive the latest news and updates.