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Burger King Mod IV&V: Valuation using FCF Jake Peng

Burger King Mod IV&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 Mod IV&V: Valuation using FCF Jake Peng

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  1. Burger King Mod IV&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 2010 and went public again 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 • Consistently high EBIT growth quarter over quarter • High operating margin (43%) • Powerful cash generation (operating cash flow = 200% of net income) • High franchise rate (99.7%)

  8. Estimate Revenue Growth • Revenue ↓and EPAT ↑ • Refranchising strategy • Avoid capital commitment • Far more profitable than self-operation (11% vs. 85%) • Historical “revenue” growth is not applicable

  9. Estimate Revenue Growth (Cont’d) • Refranchising is expected to be completed in 2013 • In 13Q3, 99.5% of 13,000+ restaurants are franchised • Only 50+ company restaurants used to test new food and image • In 13Q3, ~90% revenues come from franchise royalties • Royalty revenue is based on sales, so sales growth approximates revenue growth • Alternative: System-wide sales growth • Measures sales of all restaurants • 4% is chosen based on historical trend and international expansion

  10. EPM estimate • Historical EPM is not applicable • Refranchising has significant impact on both EPAT and Revenues • Prediction based on 13Q3 • 13Q3 is more relevant • Refranchising is nearly completed in this quarter, and EPM is expected to stabilize from then on • 40% is used as the company refranchise the last ~20 restaurants

  11. EATO estimate • Historical EATO is not applicable • Refranchising has significant impact on Sales • Merger in 2012 has significant impact on NEA • Prediction based on 13Q3 • 0.3 is used as the company refranchise the last ~20 restaurants Note: 13Q1-3 revenue is adjusted to derive the entire ‘13 revenue (1,175 = 887 * 4/3)

  12. Enterprise value based on discounted FCF ×4/3 ×4/3

  13. The End

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