Pizzas & Donuts for thought....

[Just reposting the previous note after a couple of minor corrections. Want to leave it here to facilitate further discussion about this stock.]



Hi all,

Just doing some top-down thinking on this bad boy which has been on somewhat of a round trip since the end of November 2022, with the share price going from 5.5 cents to 11.0 cents and then retracing back to 6.9 cents. In trying to get my head around the outlook for the stock I have been reflecting upon the following:

• RFG seems to have been recalibrated for the better under Peter George.
• The balance sheet seems to have been revitalized.
• Litigation risk, if not gone altogether, seems to have moderated.
• FY23 earnings guidance of Underlying EBITDA in the range of $26m - $29m, was confirmed in the recent interim result. In fact, management expects FY23 underlying EBITDA to be at the mid to upper end of the guidance range.
• Network Sales, Same Store Sales, Customer Count, and Average Transaction Value seem to be trending upward, with momentum continuing into the second half of FY23 (at the time of the interim result announcement).

I think that most would agree that one of the key barometers of any going concern lies in its capacity to generate Free Cash Flow (FCF) i.e., the cash flow remaining after non-discretionary expenses. My back of the envelope scribblings suggests that:

• If RFG earns EBITDA of say $27m in FY23, then...
• Net FCF of $15m is a reasonable possibility (i.e. after my rough estimates of working capital and stay-in-business capex are allowed for).
• At the current price of 6.9 cents, the stock has a market capitalization of c. $170m, implying a FCF Yield (FCF divided by market cap) of c. 8%+.
• The ongoing application of strategic initiatives already in place to improve the business further, suggests the potential for hopefully solid FCF growth in the future, and the upside for the share price may lie in the extent to which this is reflected in its share market rating. I will leave that judgment to others...

Other hodgepodge reflections of mine include:

• The ceasing to be a substantial shareholder by one party, juxtaposed alongside the arrival of Washington H. Soul Pattinson as both a shareholder and provider of funds replaces the former and adds some further 'gravitas' to the Balance Sheet.
• The risk of market disruption should Wendy's get its shirt together and re-enter the Australian market.
• The potential for corporate activity, although I don't think many of us would wish this to happen at the current share price! Improving RFG's currency is of cardinal importance in this context and must be one of the things front-of-mind for management and the board.
• An interest rate-led softening in the economy and hence negative impact on household consumption expenditure could hurt RFG (and the FMCG sector), meaning either the FY23 guidance is adjusted downward or more importantly the earnings outlook for FY24 is lowered.
• The possibility that in time RFG will resume paying dividends as its FCF keeps on improving (note the $50m in franking credits as per the FY22 Balance Sheet). My view is that a resumption of dividends could be a key factor in reigniting interest in the stock as a beacon for displaying that the past is well and truly behind the company and that management, and the board are confident it is back on a new and positive trajectory.
• In the absence of news flow, we may have to wait for the full-year result, and if the company indeed delivers on its guidance and paints a realistically optimistic picture for FY24, some interest in this puppy may return.

I would value your thoughts and let's keep the discussion going.

Good luck!

PS RFG is a splendid example of where I managed to snatch defeat from the jaws of victory!... having first bought the stock in 2016 at around $4.80, only to see it peak above $7.00 and NOT selling, and then to see it bottom out at a few cents...HAHAHAHA........... what's so funny!? Try explaining this to your partner..... "Are you trying to tell me that you could have sold out at $7.00 and it's now trading at 7 cents?"


Disclaimer: This is not financial advice and please DO NOT rely on my numbers, seek professional advice based on your specific investment needs and do your own research. Also, no need to share everything with your partner, right?