EUR 1100.00 For Business Accounts Only

CEE Restaurant operators - Growth on the menu (EAT PW, BUY FV PLN 51.2; SFG RO, HOLD FV RON 20.1) - IPOPEMA

Growth on the menu
We initiate our coverage for CEE Restaurant Operators with a BUY rating for
Amrest (FV of PLN 51.2, 15.6% upside) and HOLD for Sphera (FV of RON 20.1
2.3% downside). Abovementioned companies have similar business models
and both are the franchisees of Yum! Brands. Among them, we think that due
to its scale and focus on innovation Amrest is better positioned to reap
benefits from growing quick service restaurants segment. On the other hand
Sphera is a more risky play. It has been affected recently by pressure on
margins due to increases in salaries in its main market Romania. Also, the
recently started expansion into Italy still has to prove its viability and is far
from reaching an adequate scale.
Amrest: We initiate coverage of Amrest Holdings with a BUY rating and FV of
PLN 51.2, which implies 15.6% upside. We think that Amrest should continue its
expansion in Europe with 284/389/445 openings in 2019, 2020 and 2021,
respectively. Company should also improve the effectiveness of acquired
businesses, which recently was the main burden into company’s performance, we
think. Abovementioned processes should be additionally supported by ongoing
digitalization, which should affect the majority of Amrest’s operations. The company
implemented self-service kiosks which on one hand allows it to report 10% growth in
average ticket value comparing to the traditional point of sale and on the other
reduce headcount per restaurant. Also, focus on digitalization results in rollout of a
new format called shadow kitchens. We also think that the company will put more
attention to fixing internal ineffectiveness’s and therefore it will withdraw from any
M&As in the short to mid-term.
Sphera: We initiate coverage of restaurant chain operator Sphera Franchise Group
with a HOLD rating and a FV of RON 20.1 per share, which implies 2.3% downside.
The company has engaged in an accelerated development plan both in Romania and
in Italy which should allow it to increase its number of restaurants by 60% by the end
of 2022. This should allow it to capture a consumption driven GDP growth in
Romania as well as to develop on a gap in the market in Italy where there were no
KFCs until recently. On the other hand, we continue to see worries related to the
profit margins. The salary growth in Romania is still high (11% in real terms as of
July 2019) and is unlikely to be passed to prices, especially on the Pizza Hut
segment. Additionally, the Italian operations are still far from having reached a size
where they can have a meaningful contribution in terms of profit. We thus think
margins are likely to remain under pressure in the coming 12 months and a recovery
is only possible in 2020E. Additionally, we expect that a rethinking of the
development strategy will be needed, with an eventual cut in the Pizza Hut
development plan. However, this also implies a risk of penalties for non-delivery. We
would view as positive a more accelerated development in Italy, a strategy which the
management seems to be pursuing, but the market still needs to prove its viability.
On top of the above, we still see lack of clarity in some of the elements of the
corporate strategy like the dividend policy or a lack of alignment of management
interest with those of the shareholders. As a result, despite trading at similar multiples
to Amrest, we prefer only a neutral recommendation.