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Morningstar | RBI's Inaugural Investor Day Reinforces Its Longer-Term Unit Growth and Comp Potential

Restaurant Brands International's first-ever investor day on May 15 served two purposes: (1) offering an opportunity to refine the longer-term assumptions behind our discounted cash flow model and (2) getting to know new CEO Jose Cil. While future comps, operating profit growth, and return on invested capital targets would have been welcome, we believe RBI's longer-term unit target of "more than 40,000 restaurants globally over the next 8-10 years" combined with color regarding average unit volume and cash-on-cash returns across its brand and geographic portfolio should provide investors with enough of a blueprint to piece together reasonable longer-term targets.

The 40,000-unit target is consistent with our 10-year forecast, as our current model calls for 40,100 systemwide units by 2028 (25,700 Burger King, 8,000 Tim Hortons, and 6,400 Popeyes locations), implying 1,400 net new units or 4%-5% average annual unit growth. However, our key takeaway from the event is that the company may be poised to exceed these targets over the next 10 years due to existing Burger King master franchise joint venture partners (a factor behind our narrow moat rating) acquiring the rights to Popeyes and Tim Hortons as well as the creation/consolidation of new partnerships. Based on management's not-so-subtle hint that there could be upside to its 10-year growth target, we plan to raise our 2028 unit growth outlook to 40,500-41,000 locations.

Combined with new sales layers (breakfast, plant-based proteins, digital/delivery) that should put comps at 2%-3% and our updated unit growth targets, we see 7% as a reasonable operating profit growth assumption over the next five years, and we plan to increase our $65/CAD 87 fair value estimates by a few dollars to reflect these changes. While the shares strike us as fairly valued, we'd encourage investors to monitor this name for undue pullbacks due to its compelling growth, value creation, and capital allocation characteristics.

While the company's unit growth target has dominated our discussions with investors following the event, we give CEO Cil high marks on RBI's inaugural investor day. In many respects, he reminds us of several other leadership appointees across the quick-service restaurant space who understand that technology and franchisee relations have become critical in building a strong brand intangible asset and operational excellence across the system. We were also impressed by the depth of RBI's management team across its various brands, including the leadership of many of its international master franchisee joint venture partners who attended the event.

Management highlighted the potential of the global QSR burger, chicken, coffee, and bakery categories in the next five years, citing Euromonitor estimates of 5%, 6%, 5%, and 6% growth, respectively. Assuming our estimates for 3% system comps and 4%-5% unit growth are valid, this implies almost 6% annual system growth the next five years and modest market share gains. However, as we triangulate these estimates with the assumptions for other global QSR chains in our coverage universe, including McDonald's and Yum Brands (where we forecast approximately 5.5% annual system sales growth the next five years for each), we believe most of the market share gains will come from independent and smaller chains (both domestic and international), which is consistent with industry unit growth projections we offered in our 2018 Restaurant Observer, "The Restaurant Industry Is Evolving--Your Key Performance Benchmarks Need to, Too."

One of the other key takeaways from the event was the strength of RBI's master franchisee partnerships, where the company assigns master franchise rights to a combination of local operating and private equity financing partners in return for significant minority interest stakes, some governance rights, and a say in local marketing and operations. We've long thought of the master franchise joint venture structure as one of the central pillars of our narrow economic moat rating. At several points during the investor day presentations, management highlighted that the bulk of its international growth was coming from new developmental agreements formed since 2011, and we believe these partners will be critical to future unit growth due to their extensive local market expertise and access to capital. This should keep the RBI system positioned for longer-term unit growth in the mid-single-digit range (versus preacquisition growth trends in the low-single-digit range) and building an annuitylike stream of rent and royalty payments in the process. We were also encouraged that franchise partners are finding ways to accelerate unit growth, including the use of sale-leaseback transactions to improve the payback period on new restaurant builds and giving franchisees greater financial flexibility to expand.

Management also walked through future comp drivers for each brand. While each brand-specific approach had similar elements such as menu innovation, technology upgrades (point-of-sale systems, kiosks, mobile platforms), loyalty programs, and delivery functionality, most of the initiatives laid out seem achievable and are likely to be positive comp contributors. For Burger King, plant-based products like the Impossible Whopper are driving most of the headlines--and we believe the national launch later this year will be a positive contributor, assuming the company can avoid any supply disruptions--but we believe that the revamped coffee platform will help to grow the morning daypart and expanded delivery options will also help to keep U.S. Burger King comps at a 2.5%-3.0% average the next five years. Tim Hortons has seen some of the fastest adoption rates that we've seen for a restaurant loyalty program--20% of the Canada population has already enrolled six weeks after its launch, and loyalty members already account for 50% of transactions--and should drive incremental transaction growth while creating opportunities to market new products like cold beverages and plant-based breakfast sandwiches using Beyond Meat. We believe these initiatives will help Tim Hortons accelerate comps and drive an average of 2.5% growth annually the next five years. Popeyes' comp priorities are more straightforward--introducing new flavor profiles for its bone-in and boneless products, greater delivery capacity, and getting units on the same POS system--but should position the brand for 2.0%-2.5% comps annually the next five years

Combining RBI's long runway for unit growth (5% annually the next five years) with the various comp drivers (which should drive 2%-3% annual growth), we believe the company is poised for almost 6% system sales and mid- to high-single-digit adjusted EBITDA growth the next five years. Organic earnings per share should outpace EBITDA growth the next five years--likely in the low-double-digit range--benefiting from a largely fixed-rate capital structure (80% fixed), low 20s effective tax rate, and share-repurchase activity (which will be balanced with a dividend that should grow in the high single digits over the next five years). Management noted that it is still open to M&A "where it makes sense," and certainly, RBI's improved leverage position (5.1 times adjusted EBITDA versus mid- to high 5 times for other heavily franchised peers) and former CEO and current executive chairman Daniel Schwartz having greater freedom to explore potential M&A opportunities imply that RBI isn't finished building its brand portfolio. However, with current industry valuations, ongoing unit acceleration efforts for many master franchisees, and each brand's various comp enhancement plans, we don't expect any acquisitions over the near term.