The Retail Food Group Limited (ASX: RFG) share price has fallen 1% to a 52-week low of $4.37 this morning. It's not far from 2-year lows of $4.16 or 3-year lows of $3.96.
What's going on?
There are several issues. Brokers have downgraded the company in recent days due to the impending accounting change that will result in companies having to add operating leases to their balance sheets.
This will have the effect of increasing the apparent liabilities that each company holds. At present, those liabilities still exist, they're just held 'off balance sheet' and are less visible. Retail Food Group has rightly pointed out that these concerns are thin and I agree.
However, the other issues are a little larger. First is the weak performance of the company's franchise business. It is largely mature and revenue growth is minimal. There have also been concerns about the turnover of franchises, with many apparently closing last year. Media have reported elsewhere that many are up for sale.
There are also suggestions that Australian shopping centres (home of most of RFG's franchisees) could see a huge decline in foot traffic over the next 3-5 years, as has happened in the US. This ties in nicely with the 'Amazon is entering Australia' story that has been so popular recently.
There are a couple of reasons why this may not be as big a concern as many think. First is that the Australian population is so spread out that it will be a lengthy and time-consuming operation making all Aussie malls obsolete. Second, Retail Food Group is growing overseas and already 56% of company earnings before interest, tax, depreciation and amortisation (EBITDA) are earned overseas. In a few years the Australian operations could become increasingly less important.
So is Retail Food Group good value?
I think so, and I would be buying shares today if I didn't already own some. At today's price of approximately 10x earnings, for a business with strong cash flows, a good track record, and some growth opportunities (headwinds notwithstanding), Retail Food Group looks like good value over the long term. Importantly, since the price is modest, investors have a greater cushion than they would if the company was priced for a big future.
