EUR 850.00 For Business Accounts Only

Morningstar | Same-Store Sales and Unit Growth Accelerate as RBI Potentially Positions Itself for M&A

We have three investor takeaways following narrow-moat Restaurant Brands International's Jan. 23 preannouncement and management change update, highlighted by preliminary fourth-quarter same-store sales growth (1.7% at Burger King, 1.9% at Tim Hortons, and 0.1% at Popeyes), the transition of CEO Daniel Schwartz to executive chairman and the appointment of Jose Cil as CEO, and an 11% increase in the annual dividend to $2.00 per share in 2019 (representing a yield of just over 3%).

First, Tim Hortons is sustaining its recent sales momentum through Breakfast Anytime, a stronger beverage lineup, and better franchisee alignment versus a year ago, while Burger King benefited from strong value offerings, new premium launches, and app-specific marketing. We believe a continuation of these efforts--coupled with new restaurant formats and loyalty program tests--should keep comps around 2% for 2019. Second, unit growth for Burger King and Popeyes recovered in the fourth quarter to roughly equal 2017 levels, which should placate investors concerned about the slow pace of new openings last quarter. Tim Hortons is being more selective with Canada but also accelerating development outside North America. Third, while management changes are unlikely to affect day-to-day operations, it could signal that RBI is positioning itself for another acquisition. As part of his new executive chairman role, Schwartz said he will be responsible for "capital allocation and key strategic decisions such as the assessment of potential M&A opportunities." While we don't believe an acquisition is imminent, we believe there are franchised concepts with global growth potential that would fit in RBI's master franchise joint venture structure.

We'll wait until RBI reports full fourth-quarter results Feb. 11 before making final adjustments to our $62/CAD 82 fair value estimate, though near-term top-line upside and time value of money adjustments will probably add a few dollars.

While the shares strike us as fairly valued at current levels, we still see a compelling long-term story. We remain comfortable with our longer-term assumptions calling for 38,400 systemwide units by 2027 (24,400 Burger King, 7,900 Tim Hortons, and 6,100 Popeyes locations, implying 5% annual net new unit growth) because of new master franchisee joint venture partnerships for Tim Hortons over the next several years and Popeyes over a longer horizon. Our other 10-year assumptions remain intact, including 2%-3% same-store sales growth (backed by new value platforms across multiple dayparts, technology efforts, and selective price increases) and pro forma adjusted EBITDA margins growing to the mid-40s due to increased marketing scale in emerging markets and selling, general, and administrative expense reductions. RBI will host its first investor conference in May, where we expect management to put additional details behind its longer-term growth, profitability, and capital-allocation assumptions; this could act as a positive market catalyst.