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Burger King Module VII : Residual Enterprise Income Jake Peng

Burger King Module VII : Residual Enterprise Income 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 VII : Residual Enterprise Income Jake Peng

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  1. Burger King Module VII: Residual Enterprise IncomeJake 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. Estimate Revenue Growth • Revenue ↓and EPAT ↑ • Reason: Refranchising strategy Sales of franchised restaurants no longer counted as revenue • Historical “revenue” growth is irrelevant

  7. 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

  8. 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

  9. 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)

  10. DCF approach +Q3

  11. Residual Enterprise Income approach +Q3 • NEA does not grow at the same rate (g) as EPAT and revenue • The perpetual portion of PV has to be calculated separately

  12. Sensitivity analysis Analyst range: $16 – $28 SP Feb.13 2014: $25.75 SP has been striking historical records in the past week

  13. Share price TTM 2/18/2014 $26.37 48% 2/19/2013 $17.89

  14. 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)

  15. The End

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