I was once a Retail Food Group Limited (ASX: RFG) shareholder.
Unfortunately, I had to sell my holding to pay some expenses, and sure enough, six months later shares surged from $4 to $7.85.
At the time shares appeared great value at around $5, though after the dramatic rise that followed I felt I had missed the boat and moved on to the next opportunity. Now with shares back at $5.60 and trading on a Price to Earnings (P/E) ratio of 20, I feel that the company once again offers solid value and am considering a purchase.
The vertical integration offered by RFG's business model – particularly in the coffee franchises – is very desirable, and I feel that this will contribute to meaningful long-term earnings growth on top of the recently announced cost savings.
Furthermore, management's appetite for international expansion would appear to be a plus, and I am reminded of Domino's Pizza Enterprises Ltd. (ASX: DMP), an ASX-listed foodie that was able to replicate its domestic success overseas.
Retail Food Group is a way off becoming the next Domino's but as the pizza maker showed, it is perfectly possible to penetrate a mature market without having a product that is particularly new or revolutionary.
The creation of a dedicated 'International Divison' to support and expand overseas operations is also a step in the right direction, and I consider management's intention to 'Drive Brand and Brand System development with increased focus on digital opportunity' to be a leaf straight out of Domino's playbook.
However, I also see a number of risks. The biggest is that management gets too trigger-happy with acquisitions and either bites off more than they can chew and/or takes on too much debt or does too many dilutive capital raisings to fund continued growth. Patience will be important, particularly domestically as I suspect that Australia's wage and unemployment situation could worsen in the next few years, impacting sales.
I will also be looking to see that management follows through on building the company's presence and refining existing operations (e.g. with new beverages) in addition to growing by acquisition.
Despite the risks, I feel that Retail Food Group offers plenty of long-term upside to investors, and at an attractive price I am very tempted to introduce its shares to my portfolio.
