Restaurant Brands International QSR
November 30, 2017 - 4:26pm EST by
2017 2018
Price: 62.69 EPS 0 0
Shares Out. (in M): 484 P/E 0 0
Market Cap (in $M): 30,300 P/FCF 0 0
Net Debt (in $M): 11,300 EBIT 0 0
TEV (in $M): 41,600 TEV/EBIT 0 0

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Restaurant Brands International (NYSE:QSR)

Restaurant Brands International (“QSR”) is the holding company for the Burger King (“BK”), Tim Hortons (“TH”) and Popeyes brands. QSR operates a highly visible, asset light franchisor business model. ~75% of QSR’s gross profit is from high margin franchise fees and the remaining 25% is from supply chain and restaurant sales.

·         Burger King Segment (42% of 2018E profits)

o   15,700+ restaurants in 100+ countries and US territories

o   45% domestic, 55% international

o   99.7% franchised

·         Tim Hortons Segment (51% of 2018E EBITDA)

o   4,600+ restaurants

o   84% in Canada, 15% in US and 3% in Middle East

o   99.7% franchised

o   Note that supply chain and company owned stores account for ~45% of segment gross profits

·         Popeyes Segment (7% of 2018E EBITDA)

o   QSR acquired Popeyes on in April 2017 for $1.8bn EV

o   2,700 restaurants in US, 3 territories and 25 foreign countries

o   98.0% franchised


Investment Thesis

1.       QSR is the best in class platform of consolidation for undermanaged restaurant franchisors

o   QSR has the ability to organically grow the base business’s operating profit in the low teens by growing unit count ~5%-6% and comps 2-2.5%

o   Through aggressive cost cutting and acceleration of comps and unit growth after M&A, QSR has been able to drive EPS CAGR of ~35% between 2015 and 2018E, which implies 20%+ accretion from the TH and Popeyes acquisitions

o   While QSR does not intend to buy another burger, coffee or chicken concept, as these would conflict with existing brands, there still exists a number of M&A opportunities in other quick service categories like pizza, sandwiches, Mexican, and other international concepts

o   By year-end, QSR’s balance sheet will be in better shape than it was prior to the Popeyes acquisition. At 5.2x net leverage (including preferred debt) currently, QSR already has enough debt capacity to do a large scale deal. Note that leverage decreases by ~0.2-0.3x every quarter

o   While management has done a commendable job at rationalizing costs at Popeyes thus far, I believe the integration is still in the early innings there. G&A per unit decreased at BK by half between 2011 and 2017 and at TH from $41k/unit to $17.5k/unit between 2014 and 2016. I expect total G&A at Popeyes to decrease from $90mm in 2016 to $55mm in 2017

2.       White space opportunities remain plentiful at existing brands

o   BK’s unit growth opportunity is largely international. The publicly-traded quick service burger concepts have experienced no unit growth domestically since 2012

o   International MCD and BK units account for 62% and 46% of the respective systems, and have grown unit count at a 3% and 10% CAGR since 2012. In comparison, 5% and 0% of WEN and JACK’s revenue is international

o   While BK has 15,700 units globally currently, it still pales in comparison to 37,000 global units at McDonalds. QSR has been able to grow unit count by 5% on average since the 2011, and in each of the past two years

o   TH unit count has also increased by an average of 4.5% in each of the past two years after growing by 3.6% in 2014

o   Popeyes presents the largest unit growth opportunity in QSR, which can extend the Popeyes chicken concept to its entire franchisee base

§  There are only 2,700 Popeyes globally

§  Domestically, Popeyes has <2,100 units vs 4,150+ KFCs and 7,150+ BKs

§  Internationally, Popeyes has 621 units vs 16,500 KFCs and 8,550+ BKs. Popeyes has no exposure in China, where KFC is the dominant chicken brand

§  QSR actually accelerated unit growth at BK from 1.4% in 2010 to 3.9% in 2012 to 4.9% in 2016 and at TH from 3.0% in 2014 to 4.5% in 2016

·         On an absolute basis, BK accelerated unit growth from 173 in 2010 to 735 in 2016. Popeyes only added 149 stores in 2016

§  QSR has the best in class distribution network through BK’s franchisee network in over 100 countries

o   Unit growth is a more predictable source of revenue and profit growth than same store sales, which is driving the majority of growth at peers MCD and WEN

3.       Continuing menu and digital innovations at national brands will make it difficult for smaller regional operators that lack capital and awareness to compete

o   Delivery: Competitors like MCD, WEN and YUM have rolled out third party delivery services to a significant portion of their franchisee stores with exceptional customer reception. MCD has indicated that more than 70% of delivery sales are incremental as these customers would’ve otherwise ordered delivery pizza or Seamless. BK has yet to introduce a delivery service, which I expect to partially drive the next leg of SSS growth

o   Pricing: MCD and BK have cornered the sub-$3 burger market and competes for a different customer base from the better burger concepts like SHAK and HABT that start in the $5 range. Regional quick service concepts are unwilling or unable to lower pricing to the extent that MCD and BK have done

o   Digital initiatives: Technology and mobile capabilities like kiosks and mobile apps are streamlining consumers’ path to purchase and differentiating the largest chain players. TH is rolling out mobile order and pay optionality, which is driving 20% of SBUX’s peak hours orders via MO&P. BK is testing a loyalty program in parts of 15 states and expects to roll out nationally in 2018

o   Marketing: The national ad fund typically is set at a percentage of franchisee sales, which gives national operators a leg up in reaching consumers at scale. Declining sales can lead to a negative feedback loop as franchisees are less willing to reinvest in their units through remodeling or maintenance, which would lead to lower sales



·         The fairest way to value QSR against its peers is on P/E and P/FCF. QSR’s EBITDA overstates the valuation since it has an effective tax rate of ~20%

·         QSR currently trades in line without the typical “3G premium” at 23.8x 2018 P/E vs highly franchised group (MCD, YUM, DPZ, DNKN, WEN, JACK, PZZA, SONC) median of 23.6x. Excluding PZZA (which has its own idiosyncratic issues) and the regional concepts (JACK, SONC), the peer group trades at 25.5x


·         On FCF yield, QSR has an attractive 4.5% yield, which it intends to reinvest in highly accretive M&A

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




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