Restaurant Brands reported a Group net profit for the year to February 2012 of $18.4m – down 27% on the previous year. Whilst the result was significantly below the previous record year, it was largely in line with analysts’ expectations and accordingly did not negatively impact the share price.  The impact of the Christchurch earthquake has been material with around $3m in lost sales with temporary closures of a number of stores and the permanent closure of one store.  The real issue however continues to be competitive pressures which have limited the companies’ ability to pass on rising input costs and the October 2011 GST increase.  At KFC, innovation and burger promotions provided some sales growth with the Double Down promotion having a positive outcome, albeit there was some cannibalisation of other higher margin products.                

The good news is that KFC margins were much improved in the second half, which is important given that it is 89% of the company’s earnings.  Restaurant Brands will also continue with its KFC store transformation programme which should provide sales increases.  Pizza Hutt however, remains weak with EBITDA down some 63%, although the company has been successful in selling down stores from 84 to 71. 

Company Directors believe that current levels of profitability will be maintained in the face tight trading conditions and a soft retail environment through a continued focus on efficiency and cost reductions, together with new marketing initiatives.   We believe in an increasingly competitive environment Restaurant Brands will need to continue to be innovative to capture its fair share of consumers wallets.  A potential positive catalyst for Restaurant Brands will be the introduction of Carl’s Jr a new burger brand targeting hungry young men.  Restaurant Brands aims to open three to four stores in the second half of the year.  At its current share price and assuming a relatively flat result with a potential positive from Carl’s Jr, we believe that Restaurant Brands is attractively valued providing a gross dividend of around 12%. 

Disclosure:  Milford holds shares in Restaurant Brands on behalf of its clients.

Jonathan Windust