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Burger King Module V : Valuation using FCF Jake Peng

Burger King Module V : Valuation using FCF 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 V : Valuation using FCF Jake Peng

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  1. Burger King Module V: Valuation using FCFJake 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 • 12,997 restaurants in 86 countries • 1.9 billion in revenues, 118 million net income (net margin 6.2%) • 12% of total FFHR consumer spending (2012) • 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 2012

  5. Revenue breakdown

  6. Share price TTM 1/31/2014 $24.34 ~35% 2/5/2013 $17.23

  7. Reason for rise in stock price • 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 • Consistent quarterly net incomegrowth year over year • 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. Enterprise value based on discounted FCF +Q3 Buy!

  13. Sensitivity analysis Analyst range: $16 – $28 SP Feb.4: $24.36

  14. The End

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