Buy Recipe Unlimited and ‘eat in’

Recipe Unlimited’s high and growing cash flow lets it reinvest and reward shareholders with rising dividends and share buybacks. Buy RECP, ‘eat in’ tonight and get paid to do it.

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Buy shares of Recipe Unlimited and you could ‘eat in’ tonight at any of your 1,375 restaurants.

Recipe Unlimited (TSX—RECP) is Canada’s largest full-service restaurant company. It franchises and operates chains such as Swiss Chalet, Harvey’s, St. Hubert, The Keg, Milestones, Montana’s, Kelsey’s, East Side Mario’s, New York Fries, Prime Pubs, Bier Markt, Landing, Original Joe’s, State & Main, Elephant & Castle, The Burger’s Priest, The Pickle Barrel, Marigolds & Onions, and 1909 Taverne Moderne.

Recipe’s 1,375 restaurants are diversified across many food types and geared to various budgets. It is also geographically diversified. Besides Canada, the US and China, it operates in Bahrain, Macao, Oman, Panama, Qatar, Saudi Arabia and the United Arab Emirates. This reduces its risk from a weak regional economy and from natural disasters.

2019 was a disappointing year

RECP performed poorly in the first nine months of 2019. The Greater Toronto Area-based company earned an adjusted $60.9 million, or 96 cents a share. This was down by 12.7 per cent from adjusted net earnings of $70.2 million, or $1.10 a share, a year earlier.

In 2019, RECP is thought to have earned $1.50 a share. This would represent an earnings drop of more than 22 per cent, from $1.93 a share, the year before. Chief executive officer Frank Hennessey said that the company faces “headwinds due to more caution in spending being exhibited by consumers, more restaurant seats in the market, and continued staffing and wage pressure due to a four decade low in the unemployment rate.” RECP’s lower earnings explains why its shares went down this year.

In 2020, its earnings per share should rise

In 2020, RECP’s earnings are expected to rise by 16 per cent, to $1.74 a share. Based on this estimate, the shares trade at a reasonable forward price-to-earnings ratio of 10.6 times. That’s likely why the shares inched up recently after hitting a 52-week low of $18.18 a share. As long as the company continues to earn and pay more, the shares will eventually rise.

RECP’s higher expected earnings partly reflect the $125 million it spent to buy back 4,629,629 shares on September 25, 2019. It also repurchased another 1,322,871 shares in the first nine months of 2019. All told, the company spent a net $156 million on share buyback in the first nine months. Spreading the earnings over fewer shares raises its earnings per share, of course. In fact, the recent share buybacks could raise RECP’s earnings by about 10 cents a share. RECP seeks to “enhance shareholder returns through dividends and share buybacks”.

In the first nine months of 2019, RECP generated $135.5 million. This was up by 5.7 per cent from a year earlier—despite lower adjusted earnings. This exceeded the company’s net capital investment of $35.2 million, acquisitions of $8.4 million and dividend payments of $20.6 million. It spent most of its excess cash flow buying back shares.

RECP pays an annual dividend of nearly 45 cents a share. This provides a decent yield of over 2.4 per cent. The dividends are supported by the company’s higher earnings per share. What’s more, it raised its dividend in 2018 and 2019. We expect it to increase its dividend again in 2020. RECP aims to do so. Income-seeking investors will likely bid up the shares.

Management is optimistic about RECP’s outlook. It “will continue to invest in corporate restaurant renovations; support franchisees including restaurant renovation incentive programs; invest in . . . training and technology applications; invest in our new Project 2030 . . . so that we profitably meet the needs of both the consumer of today and the consumer of tomorrow; make extra contributions to franchisee marketing funds; continue to evaluate alternatives for capital deployment including growth investment, strategic acquisitions.” For instance, it has bought 249,700 units of The Keg Royalties Income Fund.

This is an edited version of an article that was originally published for subscribers in the January 24, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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