Shareholders in Retail Food Group Limited (ASX: RFG) are likely enjoying a warm fuzzy feeling today after the company not only announced record results, but made a big acquisition and declared it was on the lookout for more merger opportunities.

Here’s what you need to know:

  • Revenues rose 31% to $275 million
  • Net Profit After Tax (NPAT) rose 79% to $61 million
  • Earnings Per Share rose 69% to 37.4 cents per share
  • Dividends rose 18% to 27.5 cents per share
  • Added 84 new outlets (new total 2,530) in 11 new territories for a total of 69 territories
  • Enjoyed Average Transaction Value (ATV) and Same Store Sales (SSS) growth of +3.2% and +1.7% respectively
  • Acquisition of Hudson Pacific Corporation (“HPC”) which will add significantly to revenues and profits as well as allow cross-selling
  • Outlook for all existing units delivering growth, plus potential for further acquisitions
  • Forecast for 20% increase in NPAT in 2017, including 8% contribution from Hudson acquisition

So What?

Management certainly hyped the acquisition of HPC that was announced today, and indeed the frozen food company (which sells bakery foods etc to RFG’s franchisees) appears to offer a number of synergies and further development opportunities, including the ability to cross-sell RFG’s coffee products to HPC’s existing customers.

However, investors’ first priority should be to focus on the existing company’s results, to make sure that they’re up to scratch before buying in to the excitement of more acquisitions. Fortunately most of its operating segments delivered positive same-store sales, with Donut King and Brumby’s up 2.8% each, and Michel’s Patisserie and Coffee Retail up 1.9% and 1.5% respectively. Quick Service Restaurants (“QSR”) Crust Pizza and Pizza Capers saw a 0.2% decline in same-store sales, potentially as a result of fierce competition from Domino’s Pizza Enterprises Ltd. (ASX: DMP). It was encouraging to see a turnaround at Brumby’s and Michel’s, which have had their struggles in recent times.

Retail Food experienced strong cash flows during the year, and its operating expenses as a percentage of revenue fell from 75% to 71% (this is good), suggesting the company is achieving benefits of scale and/or that the extraction of synergies from acquired businesses has been successful.

Growing through debt

One thing investors should be aware of is Retail Food Group’s high levels of debt, with gearing (net debt divided by net debt plus equity) at 43% currently, within management’s target range of 40%-60%. By my calculations, Retail Food Group has interest cover (EBIT divided by finance costs) of around 10 times, which means the interest on its loans costs about one tenth of RFG’s Earnings Before Interest and Tax (EBIT). This is an acceptable level of cover, although well below the 30x enjoyed by CSL Limited (ASX: CSL).

Now What?

The outlook for continued profit growth will please shareholders and I expect shares will rise further in the next couple of months, particularly if there’s a buoyant outlook released at the Annual General Meeting in November. Retail Food’s focus on achieving vertical integration is already paying off for shareholders, and if it can continue to extract benefits of scale then more acquisitions like the HPC one would  make sense.

I can’t help but wonder if management is moving too fast, but while they’re continuing to deliver performance it’s hard to fault them. A chart in the accompanying results presentations suggest that Retail Food Group is thinking big:

source: Company presentations

source: Company presentation

Given the capital-light nature of the business (franchisees do most of the direct investing in stores) it makes sense to think big, and certainly there’s a lot of opportunity internationally. However, investors must be wary of overpaying. If it weren’t for the opportunity of international expansion I would suggest that today’s price is starting to look expensive for a company growing same-store sales at 1.7% per annum. It was a good year though and with a positive outlook I continue to be a happy Retail Food Group shareholder.

How 1 Man Made 100x His Money After 50

Few know, that as Warren Buffett blew out the candles on his 50th birthday cake, he had just 1% of his current fortune. Think about it: At an age when most give up hope, Buffett was just getting started on the remaining 99% of his fortune. Goes to show you that it's never too late for you to potentially get rich. Which is why we've gathered the strategies we learned from Buffett, distilled them down to 11 simple lessons, and put it in an exclusive report for you to claim. Just click here to learn more about this handy investing guide.

HOT OFF THE PRESSES: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.

Motley Fool contributor Sean O'Neill owns shares of Retail Food Group Limited. The Motley Fool Australia owns shares of Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.