Franchise owner Retail Food Group Limited (ASX: RFG) is a company most Australians won't have heard of – but I guarantee they're familiar with its brands. Retail Food Group owns the Brumby's, Michel's Patisserie, Donut King, Gloria Jeans, Crust Pizza, and several other popular franchises.
The company makes money primarily by signing up new franchisees, buying new franchises, taking a % of existing franchisee revenues, and by operating industrial coffee-roasting and baking facilities.
While the Australian business is relatively mature, Retail Food Group is also expanding internationally, with overseas franchisees in several countries contributing 14% of the company's first half earnings before interest, tax, depreciation and amortisation (EBITDA).
Outside of acquisitions, the company's growth rate is modest:
We can see here that over the past year, earnings growth in existing businesses was about 4%, with the coffee wholesale and international franchises growing at around 10%. 4% growth may not sound like much, but Retail Food Group shares are priced at around 13x earnings and pays a 5.4% dividend, so it doesn't have to grow very fast to create satisfactory returns for shareholders.
A reasonable comparison could be made with Collins Foods Ltd (ASX: CKF) which is a giant KFC and Sizzler franchisee operating in a similar sector and with similar debt levels to Retail Foods. Collins is priced at around 16x earnings, but is slightly cheaper on an Enterprise Value (market cap + net debt) to EBITDA ratio.
The primary reasons I hold Retail Food Group are this:
- Reasonable price and attractive dividends
- Strong vertical integration, one of the biggest coffee roasters and coffee franchisors in Australia (a growing market)
- I think at least one of its franchises, Gloria Jeans, could be taken global (i.e., long runway for international growth)
There are additional possible benefits if the company can make further attractive acquisitions, expand more franchises to new countries, and/or expand its coffee roasting and supply network. At today's prices I feel Retail Food Group is attractive.
