I had to be in Brisbane yesterday and placed another buy re RFG at $1.62 prior to departing. As it turned out SP briefly touched $1.62 but i missed out.
Of course the SP then surged on huge vol. I kept averaging down after initial buy at $2.86 and am holding decent size position at $2.09av. I increase the size of each buy as price falls.
I remain confident RFG will come through all the chaos and prove to be a profitable company that pays decent divs. Of course the downgrade meant everyone had to rework their calcs but an SP below $1.70 was indicative of a firm facing negative cash flow and unable to repay its loans. That simply hasn't happened and i can't foresee it occurring.
The key to RFG is their business model. Its a vertically integrated system where RFG imports raw coffee beans and then controls the process right through to it being sold to customer/consumer. Same applies to their other goods. Likewise with Hudson Conway they buy/manufacture and distribute a wide variety of food items to 2400 outlets. They make a profit on every slice of cheese and other goods sold.
Whatever the franchise brand, it depends on food items being sourced entirely from RFG's factories and warehouses. They all source from the same place.
So what does this mean? It means the businesses cannot be split up. each is part of a closed system and RFG maintains control right through to what each item is sold for.
So what will the banks do if covenants are stretched /broken. Firstly, RFG has 61% of its debt locked-in at a very low interest rate. It has 12 months remaining on several loans but is already negotiating to get them extended out over several years.
Lets assume RFG's lenders are concerned re how all the bad publicity has affected trade esp the ability of RFG to sell/open new franchises and for current franchisees wanting to sell as a going concern. Undoubtedly more stores (within Oz) will close and many, say 100, won't be replaced. 100 stores is a lot but its 4% of the 2500 outlets RFG have in this country. Stores overseas are unlikely to be affected by SMH articles.
The banks want their money back. They can't attempt to split-up and sell parts of the business as its all intertwined. The bank's best option, in fact their ONLY option is to ensure and assist RFG to keep trading and raking-in their 9% of gross takings each Monday morning. The cash flow is so strong and regular RFG will stay a viable and even vibrant company.
We currently have a Banking RC. Does anyone seriously think our banks would attempt to put RFG in a position where 2500 family businesses are threatened with closure wiping out the assets of 2500 families along with jobs of over 10,000 employees?its not going to happen. So i'm comfortable any squeezes the banks apply will not threaten the business model and cashflow.
Do changes need to be made? Of course, and we'll see them across the whole of next year.
Class action.
I'm sure this issue continues to be raised/assured by numerous posters. Plus at least one law firm is looking into whether RFG misled the market. But as i've written in several previous psts many analysts and journalists are conflating 'underlying profit' (UP) with net/reported/statuary profit (NP). Read RFG's previous years aod results and its clear they are 2 different things. I can't see whyt the CEO would repeatedly forecast UP would increase by (aprox) 6% unless it were so. A CA cannot be ruled out but i'm confident the firms can show it has not misled the shareholders. irony is i would be eligible to be part of a CA as i initially bought on the forecasts announced at AGM, 16 and then 9 days ago.
The sharp downgrade in NP released after a very long all night board meeting shocked everyone including myself. Everyone has had to redo their earnings calcs based on this new info and subsequent collapse in SP.
Earnings for FY18.
Assuming deal in M.East is consummated soon we will get 12c EPS in 1HFY18. 2H should be better although degree of asset writedowns is speculation and hard to estimate. But for 2H18 I'm plumbing for 28m = 15c EPS making a TOTAL of 27cents/share for FY18.
At current SP of $2.30 that's a PE of 8.5x and EV ratio (using a conservative ebitda of 89m) of 7.8x. Not onerous for a business with massive consistent cash flow and yet to receive the full 12 month benefit of HC. EBITDA of 95m not inconceivable but let's stick with lower amount.
Dividends.
The easiest way for RFG to relieve pressure from banks is to cut FY18 dividends. hence, I've adjusted my estimate down considerably to total div of 12.5c ffr... a payout ratio of under 50%. At SP $2.30 its a net yield of 5.4% and gross yield of almost 7.8%. Not bad.
Hence, I'm holding with confidence, esp when i feel the above forecasts are easily achievable and the RFG business model so powerful.
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