MTY Food Group Inc. (MTY)

Company Overview 

MTY Food Group Inc. (TSX: MTY) franchises and operates quick-service and casual dining restaurants of +80 brands with +6.700 locations in Canada (39%), the United States (54%), and internationally (7%). The company also operates 2 distribution centres and 2 processing plants located in Quebec. It was founded in 1979 by Ma Stanley and is headquartered in Saint-Laurent, Canada. In the last 20 years, has realised 50 acquisitions, its market cap is CA$1.3B (Mid Cap). The price range of the last 52 weeks has been CA$72.10 - CA$47.

MTY’s objectives are to generate organic growth while actively seeking good quality earning potential acquisitions. Currently, the company has less than 1% market share in North America and its top 10 brands represent 76% of System Sales (total net sales of the franchised and corporate restaurants of its network). The pandemic has affected negatively the company, during the period 2Q20-2Q21 the net location closures account for 393 locations, these represent 5% of the current number of locations. 

The variety of brand choices in its portfolio can appeal to all customers, from those who prefer the full-services dining experiences, those who want a family dine-in or dine-out family dinner as well as those who are on the run and just want to grab a quick bite.

On Dec-21 the company completed an acquisition of the assets of Koto Comptoir à Tartares (a fast-growing chain of tartare restaurants operating in Quebec), for total cash of CA$9.0 million. There are currently 31 franchised restaurants in operation. 

The company's revenues come from Franchising (royalties, initial fees, license, renewal, etc. which represent 50% of total revenues), food processing, distribution and retail (24%), corporate-owned locations (11%), and promotional funds (percentage of gross sales reported by the franchisees, account for 17% of total revenues).

Quick Checklist 

Last Years1051
Average Revenue Growth19,12%14,87%8%
Operating Margin Average26,30%22,02%22,60%
EPS CAGR11,64%8,32%330,67%
Shares Outstanding Growth2,71%4,59%-0,04%
Average ROI13,94%8,28%7,70%
Average ROE26,76%33,16%14,00%

Comments;

  • In the 4 years prior to COVID, the revenue of the company was increasing at a >30% rate. 
  • In the last 10 years, 2020 has been the only one with a negative EPS.
  • Increasing outstanding shares is not the most attractive thing. Nevertheless, it's a small and growing company. 
  • ROI and ROE have been decreasing over the years. 
  • The dividend yield has ranged from $0.86-$1.46 in the last 5 years. (suspended from 2Q2020 until 3Q2021)

Market Overview

  • MTY operates in the hospitality industry (Hotels, Restaurants and Leisure)
  • This market is highly competitive due to its low entry barriers. 
  • In Canada and the US, sales are expected to grow at 3% to 5% annually. 
  • In Canada, there are ~100K commercial foodservice units.
  • In the US, there are ~700K restaurants of which ~200K operate fast food. 

Shifts in the industry due to COVID-19

  • During the pandemic, there has been a significant consolidation, some small restaurant owners did not have the economic power to survive, which allowed larger chains to increase their market share. 
  • An increasing trend is in food delivery driven by a change in consumer behaviour. 

Competitors

The hospitality sector is highly competitive, MTY competes against restaurants, coffee shops, supermarkets, street vendors, convenience food stores, take-out & delivery operations and delicatessen. These are some of its main rivals in the Canadian market. From left to right; MTY Group, Recipe Unlimited Corporation, A&W Revenue Royalties Income Fund, Pizza Pizza Royalty Corp. and Boston Pizza Royalties Income Fund.

 MTYRECPAW.UNPZABPF.UN
Market Cap (MM)$1.264$990$590$404$347
Restaurants7.0001.341994749387
EPS CAGR (10 years)12%13%6%7%29%
PE Ratio14,7813,7720,2516,549,28

The following graph shows the CF/share among some of the competitors of MTY that operate restaurants franchises in Canada. This might be one of the greatest competitive advantages, its ability to keep accumulating Cash Flow. 



Competitive Advantage 

  • Economies of scale, the company has a greater supplier bargaining power. 
  • Relatively affordable ost of capital for becoming a franchisee ($30K-$2.5M).
  • 81 banners, often with multiple banners in one given location.
  • A decentralised approach to innovation provides a wide array of novelties.
  • Online ordering technology-driven consumers.
  • New dedicated team to develop and promote retail and production operations.

Risks

  • COVID-19 and government measures negatively affect the development of the business. However, it is expected that throughout the year restrictions will ease or completely disappear. 
  • The high competitive landscape in the hospitality sector.

Executive Team and Main Shareholders

  • Directors and Officers of the Company: 4,75M shares (19.5% of total)
    • Ma Stanley (Chairman, Director and Founder): 4M shares (16.21%) = US$168B
    • Claude St-Pierre (Secretary, Director and former CFO): 514K shares (2.08%) 
  • Fidelity Management & Research Company LLC: 3.3M shares (13.39%) = US$139B
  • Fidelity Investments Canada ULC: 2.6M shares (10.39%) = US$107B
It is a good sign that the founder is still around supervising the business and holding the largest stake among the rest directors and executives. 

Financials highlights of 2021

  • Although temporary closures increased during 1Q2022 due to additional government-mandated restrictions, as of Feb-16, 2022, only 71 locations remained temporarily closed, a decrease of 11 since Nov-30, 2021.
  • Revenue increased to $551.9M (8% increase).
  • Cash flows generated by operating activities reached $139.3 million compared to $133.7 million in 2020 (4% increase).
  • $61.2M in cash VS $360.7M total financial debt.
  • Long-term debt repayments of  $102.2M.

Valuation

Optimistic Scenario

The reasoning behind the assumptions:

  • Revenue Growth of last 5 years was of 15% annual rate. We'll assume it this way despite that during the period of 2015-2019, the company's revenue grew at a 30% annual rate.
  • The 5-year average  EBIT Margin is 22%.
  • Multiples are the average of the last 5 years.
  • Does not buy back shares.

Pessimistic Scenario

Conclusion

  • The Company is still recovering from the COVID-19 crisis. As mentioned above, the health restrictions are likely to disappear throughout the year, this will allow the company to grow at similar rates prior to the pandemic.
  • Generally, it is better when companies grow organically. Nevertheless, MTY has shown in the past how to implement a successful inorganic growth strategy.

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