Daily ShareChat: Restaurant Brands

By Jenny Ruth

Thursday 28th October 2010

Restaurant Brands' strong first-half results show its KFC refurbishment program continues to deliver significant improvements in sales and profitability, says Guy Hallwright, an analyst at Forsyth Barr.

The the company left its guidance for net profit before non-trading items for the full year ended February, 2011 unchanged between $24 million and $26 million, the first announcement for some time which didn't include a guidance upgrade.

Nevertheless, Hallwright has raised his earnings forecast for the year by 2%, or by $0.5 million to $26 million before non-trading items, and his 2012 forecast by 4%. That has led to him raising his valuation of the stock by 25 cents to $2.65.

"Management believes 20% margins are sustainable at KFC but our valuation assumes margins revert to 18% (one percentage point above their historic average) over the next seven to eight years," Hallwright says.

"If we factored in sustainable 20% KFC margins, our valuation would rise 30 cents to $2.95."

Restaurant Brands reported a 50% rise in net profit before non-trading items to $13.9 million for the six months ended September 13 with KFC's EBITDA (earnings before interest, tax, depreciation and amortisation) margin at a record 22.7% of sales. During the current year, it will refurbish eight stores and open four new KFC stores.

Recommendation: Hold.

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