Morningstar | RBI's Long-Term Potential Intact as Tim Hortons and Burger King Top-Line Drivers Evolve
We believe investors should focus on two areas coming out of Restaurant Brands' second-quarter update. The first is Tim Hortons, where despite tepid comps (0% system, 0.3% in Canada), there are indications top-line improvement plans are gaining steam. Building on its three-pronged "product excellence/restaurant experience/brand communications" plan, the company launched Breakfast Anytime across Canada last week. We're not expecting the same lift that McDonald's saw with its all-day breakfast, where comps accelerated from the low to midsingle digits. However, we believe that this, along with reimaged locations, more focused marketing tools, a CAD 100 million investment in the Tim Hortons supply chain, and biweekly franchisee meetings to promote system cohesion will drive comps to 2%-3% in 2019-20.Second, there appears to be some concern over Burger King comps, which decelerated to 1.8% from 3.8% last quarter (but accelerated to 5.7% from 3.9% on a two-year basis). Management did call out weakness in a few markets where McDonald's "Experience of the Future" has been scaled (Australia/Germany). However, we agree with management that RBI is skilled at more than just cost optimization, and don't believe the market gives enough credit to its ability to compete through menu simplification/innovation and marketing efficiency, including the category's lowest marketing cost per transaction rates. While we're expecting Burger King comps to remain in the 2% range the back half of the year, we're comfortable with our five-year forecast of 3% annual growth.
There is no change to our $66/CAD 84 fair value estimates, which assumes revenue growth in the mid- to high single digits on accelerated unit openings (including plans to open 1,500 Tim Hortons in China the next decade) and 3% system comps coupled with high-single-digit adjusted EBITDA growth. Shares appear fairly valued, but a dividend yielding almost 3% could be attractive to income investors.
Restaurant Brands International is a holding company. Through its subsidiaries, Co. is engaged as a quick service restaurant (QSR) company with over 20,000 restaurants in approximately 100 countries and U.S. territories as of Dec 31 2016. Co.'s Tim Hortons® and Burger King® brands have similar franchise business models with complementary daypart mixes. Tim Hortons restaurants are QSRs with a menu that includes coffee, tea, espresso-based hot and cold drinks, baked goods, including donuts, Timbits®, bagels, sandwiches, soups and more. Burger King restaurants are QSRs that feature flame-grilled hamburgers, chicken and other sandwiches, french fries, soft drinks and other food items.
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