Investing

Imvescor Restaurant Group – A Value Investing Analysis

About Imvescor

Imvescor (OTCPK:IRGIF) is a Canadian company primarily engaged in the business of restaurant franchising.

Imvescor has five brands: Pizza Delight, Toujours Mikes, Scores, Bâton Rouge and Ben & Florentine. The franchising segment consists primarily of franchised restaurants and company-owned restaurants. They have 253 company franchised restaurants and 7 company-owned restaurants (as of Q2 2017).

The franchising segment also includes licensed retail products (e.g. frozen pizzas sold in supermarkets). These products are manufactured and sold by third parties.

Imvescor generates revenue in three ways: from royalties on sales at franchised restaurants (they take a percentage cut of the sales), from selling products to franchisees, and from pure licensing (e.g. on consumer packaged products sold under their brands, such as frozen pizzas).

Key Figures

Current Price

$CAD 3.83

P/E (TTM)

17.34

P/S

4.7

Market Cap

$CAD 232m

Shares outstanding

60.5m

Dividend yield

2.34%

Source: Bloomberg.com

Investment Thesis

In September 2014 Imvescor brought in a new CEO, Frank Hennessey, who has made several positive changes. Hennessey has a track record from the restaurant industry, and over the last three years he has proven himself to be a very capable CEO for Imvescor.

In April 2015 Hennessey introduced a new strategic plan and since then the company has made significant improvements. The strategic plan involves refurbishing existing restaurants, and making smart acquisitions, and as a result the company’s earnings per share almost doubled from 2014 to 2016.

Imvescor has changed considerably over the last 2-3 years and there are more positive changes in the pipeline, and I believe sales and profits can grow considerably in the years to come. I do not have a price target for the company because I intend to hold the company for several years and let it compound, however I believe there is a big chance that the share price can double in the next few years.

Management

A very large part of my investment thesis is dependent on the CEO, Frank Hennessey, who has extensive experience from the restaurant industry.

He has almost three decades of experience in the restaurant industry in both Canada and the United States. He is the former President and Chief Executive Officer of Bento Sushi, a sushi restaurant chain with over 400 sushi bars in both Canada and the United States, which he turned around for a private-equity company. Prior to Bento Sushi he spent 11 years at Cara Operations, a Canadian restaurant company, and also worked for 11 years at Darden Restaurants, an American restaurant company.

In April 2015, a few months after Hennessey became CEO, Imvescor introduced a new strategic plan. According to the company:

The Strategic Plan is based on successfully improving upon the four pillars of its core business:

1. Quality of Food

2. Quality of Service

3. Value

4. Ambiance

The key objectives of the Strategic Plan are to:

• improve Same Restaurant Sales;

• improve franchisee profitability;

• enhance and leverage shared services; and

• improve shareholder returns.

As part of the plan Imvescor plans to refurbish their franchised restaurants through what they call the Restaurant Rejuvenation Program (RRP). Initially more than 100 of the franchised restaurants were interested, and to date (September 2017) Imvescor has made 51 renovations; namely 5 in 2015, 28 in 2016, and 18 to date in fiscal 2017. The RRP investment is internally financed through the Company’s cash from operations.

The Strategic Changes Have Proven Successful

The company’s strategic plan has already proved to be very successful. For the last four quarters Adjusted Revenue has increased compared to the same quarter in the previous year, and during the last quarter it increased ~20% (from Q3 2016 to Q3 2017). This is a significant improvement because before Hennessey became CEO the company’s revenues were relatively stagnant.

I believe Adjusted Revenue is a good measure to use because Imvescor has changed quite a lot over the last few years, including disposing of one of their brands (Commensal), and acquiring Ben & Florentine. The Adjusted Revenue cuts out the noise from these changes (e.g. the new Ben & Florentine restaurants are not included in revenues, which would inflate revenue numbers), and shows us if the company is growing organically.

Source: Imvescor Q3 2017 MD&A

Another revenue measure worth looking at is Same Restaurant Sales (SRS) growth. Same Restaurant Sales tells us if revenues from restaurants have grown from one year to another. This measure only includes restaurants that were in operation one year ago, and therefore it cannot be manipulated upwards by acquiring new companies, or opening new restaurants. It is therefore a measure of how well your existing restaurants are doing.

Before Frank Hennessey became CEO the company had not had positive Same Restaurant Sales growth since 2008, and then in 2015 (Hennessey’s first full year as CEO) they achieved 0.2% of SRS growth (the year before, in 2014, the SRS growth was -2.7%). In Q3 2017, on a year-to-date basis, the Company achieved SRS growth of 2.9%, and it was the ninth consecutive quarter of positive SRS growth.

And these positive changes are trickling down to the bottom line. The operating profit has increased ~50% over the last two years, and the earnings per share increased from $0.11 in 2014 (when Frank Hennessey became CEO), to $0.20 in 2016, a near doubling:

Source: company filings

Source: company filings

Moreover, the ROE has improved considerably as well. In 2014 the return on equity was 8.3%, which steadily increased to 12.7% in 2016.

Source: company filings

I believe that the financial results above are tangible evidence of management’s ability to create value for shareholders. And I think there is still a lot of runway left; to date the company has renovated 51 restaurants, while more than 100 franchisees have expressed interest (i.e. they are not even at the half way mark). Moreover, the company owns around 260 restaurants, and the management has indicated that they are willing to invest more in the Strategic Plan, so there is a lot of potential for further improvement.

Refurbished restaurants have high growth potential; management has said that in their experience restaurants can grow revenues 11%-14% per annum in the years after a restaurant has been refurbished. Therefore there is potential for double digit revenue growth in the years ahead. This has already happened; in the one year period from Q4 2015 to Q3 2016 (Q4 2015, Q1 2016, Q2 2016, Q3 2016) revenues were $39.9m, while in the next one-year period (Q4 2016 to Q3 2017) the revenues were $44.4m, an 11.4% increase.

Lastly, the company has some pricing power. While it is operating in a very competitive industry where it can’t set prices much higher than their competitors, they employ a strategy where they increase prices when they bring out a new menu. Having this ability to increase prices slightly and incrementally, simply by amending the menu, is a built in bonus.

The Balance Sheet Is Strong

The long-term debt to assets steadily decreased over the last five years, from 33% to 0% in 2016. But recently the company took on $19m in long term debt, bringing long-term debt to total assets to 12.7%, which is no reason for concern. Imvescor has a strong balance sheet, and it is throwing off a lot of free cash (free cash flow in 2016 was $13.9m) so investors can rest assured that the company’s financial position is well managed.

Strong Cash Flow, Low Capital Expenditures

The company runs an asset light business, and generates a strong free cash flow. From 2014 to 2016 the free cash flow grew 49% (chart below). On average in fiscal 2014, 2015 and 2016 the company generated cash from operations of $11.9m, while the capex was only $477k per annum, on average.

The trailing twelve month free cash flow as at Q3 2017, however, was down considerably. This decrease was in large part due to an increase in the company’s investing activities of $0.5 million for signage and corporate restaurants, and a reduction in the cash flow from operating activities of $1.3 million in Q3 2017. The reduction in operating cash flow was due to timing of cash payments and receipts, and changes in inventory levels, i.e. factors which are not permanent.

Source: company filings

The weighted average number of diluted shares was 61.2m in Q3 2017. That results in a free cash flow per share of $0.17, using the TTM number. At a current price of $3.83 the price to free cash flow is 22.5, which is not cheap, but it’s not outrageously expensive. If we use the 2016 free cash flow number, we get a price to free cash flow of 16.9. I believe this number is more representative because the TTM free cash flow is not representative of the actual cash generating ability of the company.

Acquisition of Ben & Florentine

In addition to the improvements at the company’s existing brands, Imvescor recently acquired a chain of restaurants focused on the breakfast space; Ben and Florentine. Ben & Florentine has strong potential for growth; it went from having 27 locations in 2014 to 41 today (it was founded in 2009), and generated 9% growth in same restaurant sales in 2016. Lorne Cassoff, the founder and President of Ben & Florentine, along with key members of management, will join Imvescor’s executive team and will continue to lead the brand once the transaction closes.

According to Imvescor’s 2017 Management Information Circular (which is a document explaining many of the details of the company), Ben & Florentine runs an incredibly lean operation and they have been very effective at converting revenue into EBITDA.

I am positive towards this acquisition because Frank Hennessey has a track record to date of making good business decisions, and during the Q3 2017 conference call I got the impression that he follows a strict set of principles when making acquisitions, and he will not relax those principles. Moreover, Ben & Florentine will still be run by its capable management, who have proven to be successful at growing the business.

Risks

– An “intensely competitive” industry

The restaurant industry is very competitive, and I think Imvescor explains it best in their 2014 Annual Information Form:

“The restaurant industry generally and, in particular, the family/mid-scale and casual segments of this industry are intensely competitive with respect to price, service, location and food quality. There are many well-established competitors with substantially greater financial and other resources than IRGI. Competitors include national and regional chains, as well as independently-owned restaurants. Some of IRGI’s competitors have been in existence for a longer period than IRGI, benefit from longer footprints and economies of scale, and may be better established in the markets where Restaurants are or may be located.”


There is no getting around that Imvescor operates in a very competitive industry. As an investor I will keep an eye out for the future development in Adjusted Revenue and Same Restaurant Sales growth to see if the company is losing its competitive edge.

– What If The CEO Leaves?

I mentioned above that a big part of my investment thesis is dependent on Frank Hennessey. He is the reason Imvescor is currently doing very well. If he leaves I will have to re-assess my thesis, and I am likely to sell my shares if he does.

– A Cyclical Industry

Dining at a restaurant is a discretionary purchase, and the industry therefore tends to be highly cyclical. The broad economic conditions have a big impact on the restaurant industry and if there is a recession Imvescor will surely be affected.

Conclusion

Over the last few years Frank Hennessey has proven that he is capable of adding a lot of value to the company. Despite the share price moving up considerably over the last few years I believe there is still a lot of upside because the company has yet to execute on half of its strategic plan. As the company keeps re-investing in its business the revenues will grow, and with it profits and cash. I believe there are several years left of growth in the company, and as profits grow, the share price should follow. The company currently trades around a P/E of 17, which is not cheap, but it’s not expensive either if the company can keep growing at the current clip.

Disclosure: I am/we are long IRGIF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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