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Why the Retail Food Group Limited share price is getting slammed today

Credit: Dennis Wilkinson

The Retail Food Group Limited (ASX: RFG) share price closed down 11.6% today, after it was reported that research analysts at UBS have slashed their price target on the stock 18% to $4.70 from $5.70.

The reason for the giant downgrade is reportedly due to changes to accounting IFRS methodologies due to be enforced in financial year 2019 that means  retailers will have to account for “operating leases” on their balance sheets.

This reportedly could increase the retailers’ liabilities and hence worsen their accounting debt metrics, which spells potentially bad news for groups like RFG that have historically financed a lot of their growth with debt.

Still, it must be said RFG is diversifying away from its Australian fast-food franchise business model at a good rate, with its domestic franchises now representing just 44% of group EBITDA as at the end of 2016.

Its coffee roasting, food distribution, and international divisions are its most likely candidates to deliver organic growth over time to make up for any weakness in the domestic franchise business.

It’s also important to note that forcing retailers to account for leases as liabilities should not impact their cash flows and ability to distribute dividends, with RFG’s share price all but certain to track the direction of its dividend payouts over the years ahead, assuming it can manage its debt profile.

Outlook

RFG on 10.5x trailing earnings and is on course to post 11 consecutive years of dividend increases, with a trailing yield of 6.2% plus franking credits on a payout ratio of around 66%. So, I would not bet against the share price going on to crush the market from here.

Evidently it seems some in the market (including the stock’s short sellers) are expecting some sort of bad news to come out of the company soon enough and it is one of only a few among the top 200 not to have provided any sort of trading update since posting interim results in February 2016.

Still investors shouldn’t place too much emphasis on the opinions of individual brokers such as UBS.

I took the opportunity to flick through an old UBS Securities Australia research report dated November 25 2015. It upgraded Sirtex Medical Limited (ASX: SRX) shares to a “buy” rating with a $50 price target (bull case $63.15) when Sirtex shares sold for around $39, today they sell for $11.70.

The report also put a 12-month price target of $2.80 on Slater & Gordon Limited (ASX: SGH) shares, which now sell for just 9.2 cents. Oops. While retailer Oroton Group Limited (ASX: ORL) had a 12-month price target of $2.90, with today’s price at $1.15.

This goes to show how brokers and their share price targets can be wrong at times, despite them having far-reaching fundamental research capacities. This is because analysts are only human and share prices are forward looking, although no one knows the future for sure.

Investors then would do well not to overreact to single broker calls, despite the news over the accounting changes having an impact on RFG given its already stretched debt profile.

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Motley Fool contributor Tom Richardson owns shares of Retail Food Group Limited.

You can find Tom on Twitter @tommyr345

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.

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