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Module IX: Valuation of Equity Jake Peng

Module IX: Valuation of Equity Jake Peng. Agenda. Introduction Assumption Valuation. An overview of the QSR industry. Fast Food Hamburger Restaurants (FFHR) High competitive High volume, low margin Compete on cost leadership and market penetration. Restaurant industry

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Module IX: Valuation of Equity Jake Peng

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  1. Module IX: Valuation of EquityJake Peng

  2. Agenda • Introduction • Assumption • Valuation

  3. An overview of the QSR industry • Fast Food Hamburger Restaurants (FFHR) • High competitive • High volume, low margin • Compete on cost leadership and market penetration Restaurant industry ($1.75 trillion) Fine dining Quick service restaurant “Fast casual” Others

  4. Comparison

  5. Overview of Burger King • World’s 2nd largest FFHR • 13,660 restaurants in 80+ countries • 1.1 billion in revenues, 234 million net income in 2013 • Brief history • Started in 1950s; changed hands several times • Acquired from Diageo by a P/E consortium in 2002 and first went public in 2006 • Acquired by 3G Capital in Oct. 2010 and went public again in Jun. 2012

  6. Global refranchising strategy • Sell Company restaurants to franchisees • Started in 2011, completed in 2013 • % Franchised stores up from 89% (2010) to 99.6%(2013) • Only retained 52 own stores in Florida for new product testing • Benefit • Avoid capital commitment • Focus on marketing, food innovation, and global expansion • Save one-time legal/appraisal fees

  7. Revenue breakdown (2013)

  8. Estimate Revenue Growth • Revenue ↓and EPAT ↑ • Reason: Refranchising strategy Sales of franchised restaurants no longer counted as revenue • Historical “revenue” growth is irrelevant

  9. Estimate Revenue Growth (Cont’d) • Alternative: System-wide sales growth • Measures sales of food for all restaurants • Rationale: Royalty = Sales × x% • Revenue growth set at 5% • Historical trend • International expansion

  10. EPM estimate • Historical EPM is irrelevant • Refranchising causes revenues ↑and EPAT ↓ • EPM set at 40% • Based upon 13Q3 figure • Reason: first quarter to almost complete refranchising

  11. EATO estimate • Historical EATO is irrelevant • NEA remains constant from 2011-2013, while revenues decreases • EATO expected to increase at the same rate as revenue

  12. DCF approach

  13. Estimate equity value (dividend approach) Observation: 1. Effect of horizon period is minimal 2. Primarily dependent on estimated target price

  14. Estimate equity value (RI approach) • Observation • To let adj. equity value to approximate market SP, RI growth has to be set at 8% • To assume a constant growth of RI will result EPS growth to accelerate indefinitely

  15. Sensitivity analysis (based on DCF approach) SP Mar.21 2014: $26.46 Yahoo! Analyst range: $20 – $30 • Comments: • Analysts appear estimate perpetual revenue growth between 2.9% - 4.2% • Somewhat conservative • Upon completion of the refranchising strategy, BKW is poised to establish international footprint WACC Revenue growth

  16. Questions?

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