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Burger King Module VI: Cost of Capital Jake Peng

Burger King Module VI: Cost of Capital Jake Peng. 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

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Burger King Module VI: Cost of Capital Jake Peng

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  1. Burger King Module VI: Cost of CapitalJake Peng

  2. 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

  3. Brief comparison with peers

  4. Overview of Burger King • World’s 2nd largest FFHR • 13,259 restaurants in 80+ countries • 1.9 billion in revenues, 118 million net income (net margin 6.2%) • 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

  5. Revenue breakdown

  6. Share price TTM 2/10/2014 $24.97 50.5% 2/11/2013 $16.59

  7. Reason for rise in stock price • Consistent quarterly net income growth year over year • Successful refranchising strategy (99.4% - 13Q3) • Avoid capital commitment • More profitable than self-operation (11% vs. 85%) • Focus on marketing, food innovation, and global expansion • High operating margin (52% - 13Q3) • Powerful cash generation (operating cash flow ~ revenues)

  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 all restaurants • Royalty = Sales × x% • ~90% revenues from royalties in 13Q3 • Refranchising is expected to be completed in 2013 • Only 50+ company restaurants used to test new food and image • Revenue grow set at 4% • Historical trend • International expansion

  10. EPM estimate • Historical EPM is irrelevant • Increase due to refranchising, which decreases revenues and increase EPAT • Estimation based on 13Q3 • EPM set at 40% • 3% up from 13Q3 • Completion of refranchising reduces SG&A

  11. EATO estimate • Historical EATO is irrelevant • Decrease in EATO, again, primarily due to refranchising that decreases revenues • EATO does not change from 2011 • EATO expected to increase at the same rate as revenue Note: 13Q1-3 revenue is adjusted to derive the entire ‘13 revenue (1,175 = 887 * 4/3)

  12. WACC Calculation: Step 1 WACC = Rd x Wd + Req x Weq

  13. WACC Calculation: Step 2 WACC = Rd x Wd + Req x Weq

  14. WACC Calculation: Step 3 WACC = Rd x Wd + Req x Weq • CAPM Model: • Req = β x Rm + α • Method One: Regression • weekly return • 86 weeks from 6/20/2012 (IPO date) • Volatile: 0.27 - 1.22 • Method Two: Find data online • Beta is available on only two websites • Reasons is probably that listing period is too short • Conclusion • Reliability of both method is dubious • Resort to Bloomberg

  15. DCF +Q3

  16. Sensitivity analysis Analyst range: $16 – $28 SP Feb.11 2014: $25.32 SP has been striking historical records in the past week Prediction: Earning announcement date on Feb. 13. Rise in SP likely to continue and more sharply after earnings announcement

  17. The End

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