RFG – Retail Food Group Limited

Retail Food Group Limited (ASX:RFG) is a recognised leader in retail food franchising.  It operates a number of well known brands such as Donut King, bb’s café, Brumby’s Bakerys, Michel’s Patisserie, Esquires Coffee and Pizza Capers.

The company was first established in 1989 for the purposes of developing and managing the Donut King and BBs Coffee & Croissants franchise systems.  The BB’s Coffee & Croissants system would later evolve into the current bb’s cafe system.

During the period 1999 to 2004, RFG acquired the world intellectual property rights to the Donut King system and the world intellectual property rights (excluding Europe) for the BB’s Coffee system.

Retail Food Group Limited was incorporated in 2003 to act as the ultimate holding company of their growing group of entities.

In 2007, the company acquired the then 321 outlet Brumby’s Bakery franchise system and also the 346 outlet strong Michel’s Patisserie franchise system.

Since then, Retail Food Group has acquired Queensland based Big Dad’s Pies; and the Australian and New Zealand rights to the Canadian based Esquires Coffee House system.  Earlier this year, the company also acquired the 110 store Pizza Capers franchise.

Collectively, RFG’s retail food franchise systems now represent (as at April 2012) 1261 outlets throughout Australia, New Zealand, China, Papua New Guinea, Kingdom of Saudi Arabia, Indonesia and Singapore.

Does this business have a sustainable competitive advantage?
Retail Food Group’s sustainable competitive advantage comes from its ‘strength in brands’ slogan used in its logo. With the company operating a number of retail businesses it can achieve economies of scale in areas such as:

  • Technology platforms
  • Training systems
  • Transport & logistics
  • Marketing campaigns

The company can leverage these economies to lower costs and provide a national presence for its brands more easily than smaller competitors.

What are the risks facing this business?
One risk comes from the debt levels the business has taken on in making recent acquisitions.  The acquisitions have left the company with a current net debt-to-equity position of 57%.  This debt level has lead to recent company presentations referring to the company’s need to comply with ‘debt covenants’.  These acquisitions have also had a negative effect on the company’s operating cash flow in the past financial year.

The second risk is that organic growth appears weak which is putting pressure on the profitability of the company’s franchisees.

Is it run by able and trustworthy management?
Senior management and directors have been with the company for a number of years.

The company is very pro-growth and states that they are continuing the search for more acquisitions.  This strategy is a risk given the current economic position of the business.

Is it trading at a bargain price?
Retail Food Group is a little expensive at the moment on my metrics.

Company Code Rank 2011 Actual Valuation 2012 Actual Valuation Today’s Share Price Margin of Safety 2013 Forecast Valuation 2014 Forecast Valuation
Retail Food Group RFG Silver 3 $2.47 $2.27 $2.87 -15% $2.49 $3.07

*Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

Here is a chart of the company’s share price performance over the past year.

In summary, Retail Food Group is a profitable company managing a number of well known brand names in the retail food space.  It has experienced weak cash flow in the 2012 financial year.  Its balance sheet is weaker as a result of recent acquisitions resulting in increased debt levels.  Management is attempting to grow the business both organically and via further acquisitions.

This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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