dick_fuld (81509) Generated on 5:15PM 04/22/2021 EST
RECIPE UNLIMITED CORP RECP.
April 21, 2021 - 2:30pm EST
by
Price:
Shares Out. (in M):
Market Cap (in
$M):
Net Debt (in $M):
TEV ($):
19.20
56
bentley883
2021 2022
EPS
0
0
P/E
0
0
1,084
P/FCF
0
0
505
1,598
EBIT
TEV/EBIT
0
0
0
0
Description
Investment Overview: Recipe Unlimited was IPO’ed by Fairfax Financial in 2015 and is the 3rd largest
franchise restaurant operator in Canada. We see a huge opportunity to arbitrage the post recovery
increase in valuation in restaurant stocks in the US vs the lag in Canada, and think Recipe is one of the
best options. Based on our 2022 estimate of $250 million in EBITDA and assuming a discount to the
comp group multiple of 15x EBITDA, we think Recipe has 150-200% upside to a $50-$60 stock in the
next 12 months. While restaurant shares in the US are pricing in pent up demand and the various other
benefits to large restaurant operators created by COVID (pent-up demand, greater digital presence, less
competition from independents, ghost kitchens, and lower cost structures) and are trading at 20-50%
above pre-COVID levels, Recipe is still trading ~35% below its pre-COVID highs.
Recipe has already shown in Q3 that its system sales and profitability should rebound back to preCOVID levels. In Q3, Recipe generated $0.59/share in FCF. We think that Recipe can revert back to
pre-COVID levels by Q4 of this year, and be generating a run rate of $2.50/share in FCF.
Recipe has benefited from several structural improvements during the pandemic including starting
several “ghost kitchen” concepts, including Ultimate Kitchen and MALGAM La centrale bouffe. Recipe is
among the first movers in introducing these “ghost kitchen” concepts in Canada, which take advantage
of existing infrastructure and allow customers to order from a number of different brands and mix and
match orders under their corporate umbrella. They have already had substantial success in Toronto and
will roll it out across Canada offering Recipe healthy new growth opportunities.
Recipe is planning to have an investor day in May where they will lay out their growth opportunities in
the next 12-24 months. We think the investor day and investor realization of Recipe’s 2022 profitability
and earnings power will be a significant catalyst for the stock. We believe there is no reason why the
company can’t achieve its pre-pandemic profitability target of achieving a 7%-8% operating EBITDA to
system sales margin by 2020-2022 (which was suspended during the pandemic, likely from a timing
perspective), which would translate into profitability significantly above consensus forecasts could lead
to revisions and rating upgrades.
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As illustrated in the below table, Recipe is selling at a 39% and 52% discount to the group average
EBITDA and P/E multiple of US based restaurant comp’s on FY22 consensus estimates. Investors
should think of Recipe in the same context as other restaurant companies that have significant growth
opportunities post pandemic. Thus, we believe the current valuation gap allows for a significant share rerating of Recipe when profitability recovers. As our $250 million FY22 EBITDA estimate (above
consensus forecasts) and our 15x multiple both represent a discount to the US restaurant comp average
growth and multiple, this estimate may prove conservative.
Additionally, we think under Frank Hennessy’s stewardship (he became CEO in May 2018), Recipe is
likely to take advantage of the reduced competitive environment and target rich M&A opportunities
presented by COVID in Canada to accelerate growth, and then eventually sell the business.
RECP vs. US Listed Restaurant Shares - Valuation & Growth Expectations
Company
Stock
FY22
EV/ EBITDA
P/E
FY19-FY22
EBITDA Growth
EAT
CAKE
CHUS
CBRL
DRI
DIN
DENN
KRUS
NDLS
RRGB
TXRH
YUM
11.7
16.3
19.9
14.1
17.0
12.6
17.5
57.9
14.4
11.8
17.9
19.3
14.3
22.4
33.8
20.9
19.0
14.4
26.1
Loss
24.7
53.3
29.8
25.2
18%
25%
40%
-3%
25%
-7%
-6%
52%
40%
4%
29%
15%
19.2
25.8
21%
11.8
39%
12.4
52%
-10%
Diversified Brands:
Brinker Int'l
Cheesecake Factory
Chuy's Holdings
Cracker Barrel
Darden Restaurants
DIN Brands
Denny's Corp.
Kura Sushi USA
Noodles & Co.
Red Robin Gourmet Burgers
Texas Roadhouse
Yum Brands
Average
Recipe Unlimited
Discount to Average
RECP
Note: All estimates from Cap-iq
Company Background: Formally called Cara Operations Limited (the name was changed to Recipe
Unlimited in May 2018) and with roots dating back to 1883 as a Canadian conglomerate and listed on
the TSX between 1968 to 2004, the company was taken private in 2004 and transitioned to a pure-play
branded restaurant company. After running into financial problems in late 2012, in 2013 the company
was recapitalized by Fairfax Financial Holdings who combined another restaurant organization (Prime
Restaurants) into the company’s structure for greater scale. Fairfax appointed a new management team
and board which have implemented a financial turnaround and a focus on growing the restaurant brand
portfolio. Fairfax spun off the company as an IPO in 2015 and currently maintains a 43% ownership
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position. Additionally, 22.6% of the shares are owned by the Phelan family (the original owners of Cara
Operations) through Cara Holdings.
From its IPO in 2015 RECP’s restaurant brand portfolio has grown from 10 brands and 837 locations to
25 brands and 1,341 locations as of December 2020, of which 84% are franchised. RECP’s growth has
been a result of a combination of organic growth in same restaurant sales (SRS), new store expansion
within the brands and timely accretive acquisitions. M&A has been and will continue to be a core growth
strategy of the company. From the original 10 restaurant brands in the company’s portfolio during the
IPO, major acquisitions included: NY Fries in 2015, St-Hubert in 2016 and The Keg (via a royalty pool
partnership sharing agreement) in February 2018. Today Recipe is one of the largest restaurant
operators in Canada. The brand portfolio as of December 2020 was:
New Leadership: An important addition to the management team of Recipe was the appointment of
Frank Hennessey as CEO in May 2018. Mr. Hennessey brings an excellent resume to the company
including past positions at Cara and CEO of the Harvey’s brand. Prior to rejoining Recipe, Mr.
Hennessey served as the CEO & President of Imvescor Restaurant Group since September 2014. Mr.
Hennessey joined Imvescor at a time when the company was facing declining system sales and discord
within the franchise owner base at a number of its restaurant brands. Under Mr. Hennessey’s
leadership, he took actions to revitalize and update many of the brands and improve relations with its
franchisees, which led to a rebound in growth and profitability over the next few years, eventually leading
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to a sale of the company in February 2018. Under Mr. Hennessey’s tenure at Imvescor, the shares
increased by 2.5x. Prior to Imvescor, Mr. Hennessey was CEO at Bento Sushi, a PE owned leading
North American sushi brand, from 2011-2014. During his tenure, he accelerated sales, doubled
profitability and eventually helped sell the business.
We believe that Mr. Hennessey brings to Recipe the same knowledge and insights to make strategic
improvements and investments in key brands to revitalize growth and divest others that do not fit the
company’s long-term strategy. To date, Mr. Hennessey has taken steps to reposition the brands,
streamline menus, improve franchisee profitability and build out omni-channel e-commerce business.
Moreover, as a long-term industry veteran, Mr. Hennessey knowledge of the industry landscape and
major players should prove beneficial in the post pandemic period likely to be marked by a period of
consolidation and potential growth M&A opportunities for the strong financial survivors like Recipe.
Pandemic Impact Has Been Minimal On Recipe’s Restaurant Portfolio: In March Recipe closed all
its restaurants with its franchisees focusing on maximizing their takeout and delivery business. During
the early days of the pandemic the company worked with its franchisees regarding landlord rent
deferrals and maximizing their participation in Canadian government wage recovery (CEWS) and rent
accommodation programs (CECRA & CERS); both assistance programs will continue to June 2021. In
addition, Recipe established a rent assistance program with franchisees to manage/fund rent with its
landlords (at a $32-35 million cost to the company) and provided temporary royalty breaks when
necessary. The goal of these measures was to help Recipe’s franchisees manage through the pandemic
and be positioned for a 2021 recovery.
Given Recipe’s brand portfolio being primarily a casual dining company with some QSR-like brands, has
helped the company weather the pandemic in good shape. With about 10% of overall locations in
downtown urban locations, many of the company’s largest brands somewhat QSR in nature (especially
St-Hubert as well as Harvey’s and Swiss Chalet) with strong pre-pandemic take-out businesses (StHubert & Swiss Chalet had been running ~45% of sales) and minimal mall exposure, the risk profile of
the franchise base is not high to permanent closures. Noteworthy, a key differentiator which has helped
Recipe whether the pandemic is its significant pre-pandemic e-commerce business which was running
close to $500 million on an annual basis. While there has been some near normal franchise turnover
from owners who were facing business challenges pre-pandemic and chose to close, all evidence
suggests the overwhelming majority of franchisees have to date and will make it through the pandemic.
From a beginning pandemic level of 1,363 locations in March 2020, the number of locations has
declined to only 1,341 as of December 2020.
Growing Counter Pandemic Cyclical Retail & Catering Business: A key part of Recipe’s business is
a large ~$330 million brand name grocery brand food distribution business that has remained healthy
and has proven somewhat counter pandemic cyclical. Recipe sells a broad portfolio of branded food
products (ribs, pot pies, sauces, etc.) carrying the St-Hubert’s, Montana & Swiss Chalet labels where the
products are #1 or #2 in their respective categories to a growing number of Canadian retailers. With
restaurants in Canada mostly closed and stay-in-place orders in many areas, beginning in Q2,
consumers increased their purchases of foods to prepare at home. As a result, Recipe recorded a 32%
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increase in its Retail & Catering sales in FY20. This division accounted for 42% of EBITDA in FY20 (vs
17% in FY19) and helped to offset the impact of the pandemic on its restaurant business. In addition to
the profitability of the sales of these branded food grocery items, the increased placement of these items
in a growing number of retail stores serves to reinforce and increase the strength of these brands and
should help drive more consumers to visit the respective restaurants.
Ultimate Kitchen Concept Launch Leverages Recipe’s Advantages & Offers Attractive Growth
Opportunities: Taking advantage from the opportunity that the pandemic has accelerated/created in the
growth of off premise, Recipe has launched an initiative based on the “ghost kitchen” concept that the
company believes represents a significant opportunity for the future growth and expansion. Labeled
Ultimate Kitchen, this is a delivery and takeout concept where a single location is able to offer customers
greater choice and the ability to order from multiple brands within the same order at the same time. This
model allows customers to order ahead and have delivered or pick up multiple brands on a one-stop
shop basis. It also allows Recipe to serve markets where it may otherwise be cost prohibitive to build a
traditional restaurant. Recipe can also leverage these Ultimate Kitchen locations to expand its
relationships with brands outside its network. For example, Recipe cosigned partnership deals with
Blondies Pizza, a successful local pizza company in Toronto and Bento Sushi, a leading national
supplier of sushi in Canada, to join the lineup of brands being offered at Ultimate Kitchen. Having a
diverse portfolio of brands, gives the company a competitive advantage in that customers will be able to
order food from a number of the company’s different brands (from sushi to burgers to pizza to Mexican,
for example) all in one order to satisfy the desires of different people.
During FY20, Recipe opened 2 Ultimate Kitchen concept locations in Toronto. In addition, 2 other
Ultimate Kitchen locations are planned for opening in Montreal and Hamilton, Ontario by the end of Q2
FY21, with the company expecting to have up to 6 additional locations by the end of the fiscal year.
While currently focused on the Ontario market, we believe Ultimate Kitchen can be expanded to other
major Canadian (and possibly US) major metropolitan markets.
Complementing Ultimate Kitchen and inspired by the idea of “ghost kitchens”, Recipe’s St-Hubert brand
launched a new concept called MALGAM La centrale bouffe, which combines several restaurant brands
at the same location. The first location opened in April with a capital investment of only $2 million (CAD)
in a former St-Hubert’s location in Québec. This new concept offers menus from four popular restaurants
in Québec; St-Hubert, Sushi Taxi, Harvey's and New York Fries (with additional brands likely to join), for
take-out or via a delivery service. We expect this concept will be rolled out further in the province with
additional locations opening this year.
With Ultimate Kitchen and MALGAM La centrale bouffe, Recipe appears to be a first mover in Canada in
taking advantage of some accelerated trends in the market caused by the pandemic which should add
to its growth opportunities.
Balance Sheet Strength A Key Industry Differentiator: Recipe had healthy balance sheet strength
going into the pandemic and took steps to maintain its strong footing thru 2020. Early on, the company
drew down $300 million on its credit facility in March, amended credit covenants in May for continued
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flexibility and in the height of the pandemic in Q2 when they were not collecting full royalties had a cash
burn of only $25 million in the quarter. In Q3, when reopening’s were growing steadily, Recipe
generated $.59/share in free cash flow and paid down $200 million in August on its credit facility. As a
result, net total debt and leverage has been reduced from Q2 levels, while the company currently has
$300 million on its credit facility. Recipe’s strong balance sheet and liquidity is a key differentiator in
what has been a hard hit restaurant industry in Canada. Independent restaurants are finding it tough to
get loans, raise capital and get insurance. Recipe’s balance sheet, relationships with banks and access
to the financial markets should give the company the financial ammunition to take advantage of what we
believe will be a target rich environment for M&A coming out of the pandemic to accelerate future growth
prospects.
Q3 Financial Rebound Tied To Reopening’s Illustrates The Resiliency Of The Business &
Recipe’s Earnings Power Post Pandemic: Recipe’s system sales trends in FY20 during the pandemic
have tracked commensurate with store openings/closing trends associated with local and provincial lockdowns tied to virus infection rates in Canada. The charts below show the trend of infections and deaths
in Canada since the beginning of the pandemic in February/March 2020.
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Source: New York Times
Q2 marked the low point for system sales when all store locations were initially closed in the early days
of the pandemic when virus cases and deaths surged.
Beginning in the Summer of 2020 when virus cases dropped notably leaving to an easing of lockdowns
and government restrictions on indoor dining rooms reopening, Recipe stated that they saw their system
sales improve meaningfully week-to-week. The reopening’s of stores and indoor dining in Q3 translated
into a significant rebound in system sales, profitability and cash flow. Recipe’s strong rebound in Q3
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(ended September) system sales and profitability illustrate the resiliency in the company’s brands and
the pent-up desire of consumers to return to restaurants. In Q3 system sales and operating EBITDA
rebounded to ~80% of pre-pandemic levels, while FCF before growth cap-ex grew slightly on a
year/year basis to $0.59 per share, or ~$2.40/share annualized. We believe the quick and notable
financial rebound and results in Q3, which is not normally the strongest quarter of the fiscal year,
illustrated the resiliency in Recipe’s business and illustrated the near-term earnings power of the
company in a post pandemic environment. The increase in system sales during this period also shows
the appetite and pent-up demand that Canadian consumers, similar to what we have seen in the US,
have to return to restaurants. So clearly the biggest factor that drove the Q3 rebound in profitability was
the ability of Recipe to reopen its restaurant locations and increase its total operating weeks. Thus, Q3
provides investors evidence that Recipe’s overall business and profitability will rebound relatively quickly
once lockdowns and restrictions are eased.
Now In The 2/3nd Phase Of Canadian Lockdowns; Recovery Stalled: However, with a spike in
infections beginning again in the September/October time frame, Canada began the 2nd wave of
government imposed dining restrictions and lockdowns in the Fall, with more strict measures beginning
on December 16th and continued thru Q1 FY21. Some provinces eased restriction temporarily in March,
only to reinstate them in April. These on/off/on restrictions in Canada contrast with what has been a
general easing in most states in the US, with indoor dining opening restrictions being reduced or
eliminated in many states. Most US restaurant operators have noted a significant increase in demand
when indoor dining restrictions are eased.
With 43% of Q4 operating weeks negatively impacted by either dining room closures or complete
closures, Recipe’s quarterly system sales and profitability declined from Q3 levels. With a full quarter of
lockdowns in place during Q1, it is possible that Recipe’s Q1 results may take another modest step
down from Q4 results, but still be significantly better than Q2 FY20 results.
Increased Vaccinations Will Drive A Recovery: It is unclear when lockdowns and Canadian
government imposed dining restrictions will ease, but will likely be influenced by infection and
hospitalization levels. Vaccination rates in Canada will be a key driver of reopening’s and as illustrated
in the following recent news story and below chart, have trailed the US and Western European
vaccination levels.
https://www.wsj.com/articles/as-the-u-s-vaccinates-millions-for-covid-19-most-canadians-are-stillwaiting-11617905495?mod=searchresults_pos1&page=1
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The good news is that vaccination rates in Canada have begun to accelerate and recent government
expectations are that most people should be able to get a vaccination if they want by the June time
frame.
Source: https://health-infobase.canada.ca/covid-19/vaccination-coverage/
FY21 A Transition Year; FY22 The Recovery Year: If the Canadian government's vaccination
timetable is realistic, we should see a positive inflection point in Recipe’s business in the 2nd half of
FY21, with FY22 being a year that system sales could return close to FY19 levels. For FY21 we suspect
that Q1 will likely mark the low point for recipe’s system sales, Q2 will show modest improvement and
that beginning in Q3 and accelerating into Q4 they will revert back to traditional seasonal levels. In
FY22, while we expect that the number of Recipe locations will decline over the FY19 to FY22 time
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period due to normal franchise transitions by about 5% to ~1,300 locations from 1,373 in December
2019 (the pandemic has accelerated some normal closures), we believe the company’s system sales
(excluding for the moment any M&A growth in acquiring new brands) could come close to approximating
FY19 levels due to the continuation of take-out and delivery remaining a new avenue of incremental
revenues for many franchisees, higher average sales per location (due to reduced competition) and
inflation related price increases. Moreover, Recipe management has stated that when system sales
return to FY19 levels, the company will be more profitable. While there will be some modest permanent
corporate overhead savings that many other companies will see (greater remote workers, less travel,
lower rents, etc.), profitability and cash flow for Recipe will be enhanced by the elimination of a number
of underperforming locations which the company had to subsidize with royalty relief and/or rent
assistance and the conversion of corporate stores into the franchise base. Thus, for FY22 (again
excluding potential growth M&A) we believe system sales will come close to FY19 levels of $3.487
billion, with EBITDA at or slightly exceeding the $216 million recorded in FY19 and free cash flow
approximating $2.50 per share.
The Post-Pandemic Industry Environment; Less Competition & A Target Rich M&A Landscape:
The overall industry landscape for strong survivors like Recipe should be more favorable than the past
few years. One major outcome is that the overall restaurant industry is likely to get less competitive.
Various industry sources speculate that the pandemic could result in the elimination of roughly 10,000
restaurants or 15%-25% of the industry (mostly independents) in Canada. Information from Canadian
food wholesalers suggest the true final number when all is said and done could even be higher.
Additionally, we understand that many independent restaurants still operationally are struggling
financially and are having challenges in the current environment getting financing and insurance. This is
significant as in recent years there has been a growing oversaturation of restaurants in the country and
the pandemic may have accelerated in a brief period what was likely to be a natural consolidation in the
market. We have heard from sources that in the 4 years prior to the pandemic the number of new full
service restaurants in Canada had been growing at about +15% annually with restaurants per capita in
Canada well above US levels. Noteworthy, this oversaturation in Canada has been weighing heavily on
same store sales and was a major reason for the challenges that Recipe had faced in FY19 with organic
growth.
A side note benefit to the closing of many restaurants in Canada due to the pandemic is related to real
estate. With many new vacancies due to restaurant closures, Recipe has some leverage with landlords
to garner more favorable leases and now has the ability to gain access to key locations that were
previously unavailable.
The second important factor relative to the post pandemic industry environment which will benefit
Recipe is with a number of restaurant brands impacted by the financial toll of the pandemic it is likely
that many will be forced to merge or sell themselves to financially stronger organizations like Recipe to
continue to operate and prosper. With its balance sheet strength, including a healthy amount of liquidity
as well as access to the debt and capital markets, Recipe is in a prime position to take advantage of the
opportunity. M&A has been, and will likely continue to be a key part of the company’s growth strategy.
Recipe has a history of making accretive growth-oriented acquisitions since its IPO, growing the portfolio
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from 10 brands to 25 since 2015. Also, we sense that the company may also use the post pandemic
environment to divest some poorly performing or not well positioned brands to increase the overall
profitability of its portfolio and growth prospects. It is likely that Recipe will move closer to having a few
large high cash flow generating brands with more moderate growth prospects combined with some
younger brands with healthy organic growth prospects.
A Strong Track Record Of Growing Profitability Aided By An Accretive M&A Strategy: Since
Recipe’s IPO, the company has delivered a strong track record of growing profitability pre-pandemic.
Over the pre-pandemic period from FY13 to FY19, Recipe grew its operating EBITDA at a 28.5%
CAGR.
A major element of the company growth over this time period was a number of accretive acquisitions,
with the most significant being: NY Fries in October 2115, St-Hubert in September 2016, Burger’s Priest
in June 2017 and The Keg in February 2018. In FY19 the company’s EBITDA growth slowed due to a
couple of factors. The acquisition of The Keg included the integration of a number of lower margin
corporate restaurants into Recipe’s financials as well as franchisees who were grandfathered in under
lower than corporate average royalties until their renewals became effective at a higher rate. Also, new
CEO, Frank Hennessey, slowed down the pace of company acquisitions in order to reassess and
redesign Recipe’s acquisition strategy. Finally, the growing competitive environment in Canada marked
by an oversaturation of restaurants per capita began to have a negative impact on organic same
restaurant sales (SRS) growth.
We believe these factors that pressured FY19 growth and EBITDA profitability will prove temporary and
Recipe will reaccelerate its post pandemic EBITDA growth to a CAGR in the 15%-20% range aided by
improved SRS growth, accretive M&A and possible divestitures of non-strategic lower profitability
locations/brands. Outlined above were our thoughts on how the pandemic has improved the competitive
landscape in Canada and would likely create M&A opportunities. In addition, CEO Frank Hennessey had
made a number of internal changes with a number of brands to freshen the banners and improve SRS
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that were beginning to take hold pre-pandemic that should play out when restaurants reopen post
pandemic.
Vaccine Roll Out Gap Creates Mis-Pricing Opportunity, With Significant Upside Share Potential:
We believe that some Canadian restaurant stocks like Recipe are mispriced relative to US traded
comp’s due to the relative lag in Canadian vaccination levels compared with those in the US, which has
resulted in longer provincial and regional lockdowns and government restrictions on dining rooms being
opened. Thus, delaying the reopening story trade for many Canadian consumer stocks and creating the
current investment opportunity.
Despite rebounding from oversold March pandemic lows during the panic selling period, the shares of
Recipe are still selling at levels about 35% below 2019 levels.
This chart illustrates the significant penalty that RECP was given by investors relative to what appeared
to be near bankruptcy levels in the early days of the pandemic relative to the overall market and other
restaurant shares. While the shares have rebounded significantly off these levels, the shares still have
not closed the underperformance gap relative to other restaurant comp’s and have underperformed the
overall market.
RECP vs the S&P 500 Restaurant Index (February 2020 to Present)
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Additionally, as illustrated previously, on a valuation basis RECP’s valuation trails that of many US
restaurant stocks
The Roadmap To A $60+ Stock: We believe the shares of Recipe are mis-priced on both a near-term
and longer term basis. In Q3, Recipe generated $.59/share in FCF. We think that Recipe can revert
back to pre-covid levels by Q4 of this year, and be generating a run rate of $2.50/share in FCF. As
illustrated in the below chart, the shares of Recipe are currently trading well below its pre-pandemic
trailing 12-month P/FCF trading range multiple average of 20x.
The company’s FCF multiple also trails its US comp average of ~15x FCF. If we use the group average
P/FCF multiple of 15x on Q4 FY20 run rate FCF, the stock should trade at $37.50/share or 80% upside
from current levels.
In FY 22, we believe Recipe’s business will return back to more traditional levels and that with pent-up
demand, additional off-premise take-out/delivery revenues and contribution from ghost kitchens, system
sales and revenues (excluding an M&A growth) at least equal or exceed FY19 pre-pandemic levels.
With some permanent cost reduction and efficiency savings in the business, we believe EBITDA
profitability could reach ~$250 million, at least on a run rate basis, which would exceed FY19 EBITDA by
~15%. Such a post-pandemic increase in profitability for RECP would be consistent with what we are
seeing for US based QSR/casual dining restaurants (illustrated earlier in the report). As our $250 million
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FY22 EBITDA estimate (above consensus forecasts) and our 15x multiple both represent a discount to
the US restaurant comp average growth and multiple, this estimate may prove conservative. The
average EBITDA growth for FY22 vs FY19 for US based casual dining restaurant companies is ~21%. If
we apply that metric to Recipe’s 2019 $216 million pre-pandemic EBITDA we get $ 263 million in
EBITDA. We use $250 million to be conservative as well as 15x 2022E EBITDA when the comp group is
trading at 16x FY22 EBITDA.
Moreover, our $250 million EBITDA estimate would be within the range of management's pre-pandemic
target. Prior to FY20, management had stated in the MD&A the following: “Management’s focus will
continue to be on improving the earnings efficiency of our assets and our increased sales base to grow
Operating EBITDA as a percentage of System Sales back to within our 7% to 8% target range by 20202022”. While the pandemic has changed the timeframe to achieve this target, we believe it is still
realistic. Noteworthy, using FY19 systems sales, the 7% to 8% target would translate into $244-$279
million in EBITDA, which is consistent with our FY22 estimate.
Assuming an industry average 15x multiple on our FY22 EBITDA estimate of $250 million translates into
a $55-60 share price in 12-18 months.
Additionally, we think under Frank Hennessy’s stewardship, Recipe is likely to take advantage of the
reduced competitive environment and target rich M&A opportunities presented by COVID in Canada to
accelerate growth, and then eventually sell the business. We think that with beneficial M&A in ~3 years
Recipe could be earning ~$300 million in EBITDA and could be sold for 12-15x EBITDA, which would
lead to a share price of around $60-$80/share or 200-300% upside from today’s levels.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
An easing of government imposed lockdowns & restrictions throughout Canada.
Growing system sales and profitability post pandemic to/above FY19 pre-pandemic levels.
A possible investor day event in May where management will highlight its growth opportunities in the next 12-24
months.
Management re-establishing its future EBITDA/system sales targets.
An increase in future profitability forecasts.
Sell-side analyst upgrades.
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dick_fuld (81509) Generated on 5:15PM 04/22/2021 EST
Messages
Subject
SSSG
Entry
04/21/2021 10:02 PM
Member
Bismarck
Why have comps been weak in the past? What's going to change in the future (covid aside) that will re-rate this
sustainbly to other comps? Most of the comps you cited have better SSSG than Recipe's restaurants.
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