You are, of course, entitled to assume whatever you want with respect to valuing RFG, but i'd suggest two things are very likely: 1) earnings are going down significantly from where they were historically (and 2H18 will be the first reporting period to reveal the true extent of the damage), and 2) the company will need to raise equity as a consequence of its reduced earnings leading to RFG's inability to meet newly imposed banking covenants.
If you do a basic scenario analysis which assumes RFG is going to be forced to raise equity, one can start to understand why RFG is trading where it is today. Below is my attempt at this scenario analysis, which is driven by some very basic assumptions around RFG's sustainable EBITDA (which i've laid out as being anywhere from $60m-$100m), sustainable debt load (1.75x sustainable EBITDA would be about right, as anything above 2x is over-levered), and desired EBITDA entry multiple for new equity (i've said 7x EBITDA, which i'd say is arguably generous given the need to entice investors buying into a business like RFG which has so many issues and so much uncertainty). Below is the result of the analysis:
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
Column 5 |
Column 6 |
| 1 |
|
|
|
|
|
|
| 2 |
Assumed sustainable RFG EBITDA (m) |
$60.00 |
$70.00 |
$80.00 |
$90.00 |
$100.00 |
| 3 |
Target pro forma leverage (x EBITDA) |
1.75 |
1.75 |
1.75 |
1.75 |
1.75 |
| 4 |
Target pro forma net debt (m) |
$105.00 |
$122.50 |
$140.00 |
$157.50 |
$175.00 |
| 5 |
Current RFG net debt (m) |
$260.00 |
$260.00 |
$260.00 |
$260.00 |
$260.00 |
| 6 |
Equity raising required (incl 4% fees, m) |
$161.20 |
$143.00 |
$124.80 |
$106.60 |
$88.40 |
| 7 |
Pro forma recap valuation (x EBITDA) |
7.00 |
7.00 |
7.00 |
7.00 |
7.00 |
| 8 |
Pro forma EV (m) |
$420.00 |
$490.00 |
$560.00 |
$630.00 |
$700.00 |
| 9 |
Implied pro forma market cap (m) |
$315.00 |
$367.50 |
$420.00 |
$472.50 |
$525.00 |
| 10 |
% new equity ownership |
51.17% |
38.91% |
29.71% |
22.56% |
16.84% |
| 11 |
% existing equity ownership |
48.83% |
61.09% |
70.29% |
77.44% |
83.16% |
| 12 |
Implied value of existing equity (m) |
$153.80 |
$224.50 |
$295.20 |
$365.90 |
$436.60 |
| 13 |
Current RFG market cap (m) |
$217.00 |
$217.00 |
$217.00 |
$217.00 |
$217.00 |
| 14 |
Upside/downside on current market cap |
-29.12% |
3.46% |
36.04% |
68.62% |
101.20% |
| 15 |
|
|
|
|
|
|
| 16 |
New equity proportionate EBITDA (m) |
$30.70 |
$27.24 |
$23.77 |
$20.30 |
$16.84 |
| 17 |
New equity proportionate pro forma EV (m) |
$214.93 |
$190.67 |
$166.40 |
$142.13 |
$117.87 |
| 18 |
New equity EV/EBITDA (m) |
7.00 |
7.00 |
7.00 |
7.00 |
7.00 |
What you can see is that, even at today's $217m market cap, RFG has downside if EBITDA falls far enough (to sub $70m) or new equity comes in at, say, 6x rather than 7x sustainable EBITDA (which is entirely possible as new equity usually requires a pretty steep discount to invest in high risk situations like RFG). Indeed, if one assumes new equity demands entry at 6x sustainable EBITDA (rather than 7x), any sustainable EBITDA less than ~$80m results in downside to existing equity at its current $217m market cap.
My conclusion in light of this basic analysis is that RFG is still not a favorable enough risk-adjusted punt. I'd be willing to take a punt on RFG at ~$1.00, implying a ~$100m market cap for existing equity, which would allow for minimal equity downside on an assumed sustainable EBITDA of $60m capped at 6x at a recapitalised 1.75x EBITDA leverage.
(20min delay)
