November 11, 2017 - 10:05pm EST by
2017 2018
Price: 19.50 EPS 2.15 2.74
Shares Out. (in M): 6 P/E 9 7
Market Cap (in $M): 119 P/FCF 5.5 8.7
Net Debt (in $M): 81 EBIT 13 17
TEV (in $M): 210 TEV/EBIT 12.8 16

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Meritage Hospitality Group (MHGU) is a $119mm mkt cap franchisee of Wendy's restaurants and at the current levels offers a better than 16% IRR over the next 3 years or a 58% total return. Insiders own more than 65% of the company. This is a small and illiquid idea for personal accounts and/or small funds. 

The company buys restaurants from retiring franchisees, implements their operating platform and re-images the restaurants. This results in an increase in sales and ebitda.







There are 6,537 franchised Wendy's restaurants operated by 294 franchisees. The average Wendy's franchisee is 68 years old and owns 18 restaurants. 1/3 of Wendy's system franchise agreements are set to expire over the next 36 months. Meritage plans to increase store count from 252 today to 420 by the end of 2021. The company has a history of achieving guidance as they previously set out a 5 year plan in 2011 to grow from 73 restaurants to 150 by the end of 2015 which they achieved.

The below sensitivity lays out what earnings/ multiples the company needs to achieve/ trade at for investors to realize a 20% IRR. I'm assuming 2.5% SSS going forward and incremental margins in the low teens (bottoming at only 6% IMs in 2018 on cost inflation). For the past two years the company has put up 16% IMs and 3.5%+ SSS. Note the company's guidance is for $60mm of ebitda in 2021.

The model is sensitive to how much the company pays for new locations. Historically it looks like they've paid <$1.5mm per store. At those prices the stock works nicely. The low end of the below table is $1mm and the high end is $2mm.  TAST, a burger king operator, trades at 8x trailing ev/ebitda and have used that as my base case exit valuation for the below sensitivity. As you can see, if we assume the company is able to purchase locations for 1.25mm our IRR increases to 20%+ at an 8x exit mult. 

How to lose money

1. Company is unable to grow, unable to purchase stores to meet their growth plans. If this were to transpire I think the FCF yield is enough to support the stock, so I think principal is well protected at current levels.  

2. Rats fall from the ceilings at a Wendy's restaurant. Folks concerned about brand risk can short WEN. 

3. Company overpays for acquisitions. I think this is unlikely given the incentives here. The company has a saying, 'friends don't let friends make dilutive acquisitions.'

4. Traffic slows and EBITDA deteriorates. We're buying restaurants. Amazon is not out to get us here and given the valuation I think we're being compensated nicely for what we're buying. 


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Earnings grow as the management team executes.  

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