After looking enviously at shareholders of Retail Food Group Limited (ASX: RFG) as shares soared to $7 on the back of the Gloria Jeans, and then Di Bella Coffee acquisitions, I finally got the opportunity to add the company to my portfolio.
Not too long ago, I bought a parcel of RFG shares equivalent to roughly 4% of my portfolio. Here are 4 reasons why:
- Great stable of brands
Donut King, Brumby's, Michel's Patisserie, Pizza Capers, Crust, Cafe2U, Di Bella's Coffee, Gloria Jeans, and more. Despite a challenging retail environment, the company grew total same-store sales and average transaction value by an average of 2.9% and 3.4% respectively in 2015. This follows on from several years of similar performance.
Some brands are performing fairly ordinarily, like Michel's Patisserie (which is the focus of a turnaround project), but many including Pizza Capers and Crust are performing well above the average for their segment. Additionally, the nature of these businesses is such that they are among the last luxuries to go when unemployment rises and wages fall.
Can you imagine a world where office workers don't drink coffee or eat pizza? That's what I thought.
2. Strong track record of acquisitions
Each of RFG's brands had to be added to the stable at some point in recent years and they have performed phenomenally well for the company, which has grown profits at a Compound Annual Growth Rate (CAGR) of 25% per annum for the past 9 years.
Last year, in particular, I felt that the Gloria Jeans and Di Bella coffee acquisitions really 'made' the company, which is now more coffee-focussed – but still well diversified – than at any time in the past. By 2018, the coffee segment is expected to make up 40% of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA), while international businesses will be worth 25% of EBITDA.
3. Great growth outlook
Profits are expected to grow by a further 20% in Financial Year 2016 (this year), with further growth forecast in 2017 and 2018 as the company extracts cost savings from its recent acquisitions. Additionally RFG now controls approximately 30% of the total coffee roasting capacity in Australia, which puts it in a great position to both open new franchises and supply non-related coffee businesses.
Further acquisitions both domestically and overseas are on the cards.
4. International
Retail Food Group wants to do a Domino's Pizza Enterprises Ltd. (ASX: DMP) and expand overseas in a big way. RFG has already founded a joint-venture to take Gloria Jeans into China, and its donut segment is expected to experience a strong uptake from South-East Asia.
With 25% of EBITDA set to be earned in foreign currency by 2018, RFG has another powerful tailwind in the form of a lower Australian dollar. There is also ample opportunity to grow franchise fast food businesses, as Domino's Pizza has already shown.
4. It's dirt cheap
Trading on a Price to Earnings (P/E) ratio of below 12 at the current price of around $4.16, Retail Food Group is both substantially cheaper than the average market, and has significantly greater growth prospects. Even better, the stock boasts a 6%, fully-franked dividend yield that looks eminently sustainable as it represents just 65% of net profits.
Additionally, shares are down 11% for the year despite the fact that Earnings Per Share (EPS) grew by 35% during this time.
With all these factors in its favour, Retail Food Group looks to be an outstanding buy at today's prices, and I am considering adding more shares when Foolish trading rules (preventing me from writing about stocks I buy/sell) permit.
