The bargain hunter’s guide to Retail Food Group Limited shares

Credit: tenaciousme

It’s been a great day so far for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), but an even better one for shareholders of Retail Food Group Limited (ASX: RFG), who have seen its share price climb by over 5% today.

Whilst there was no new company-specific information released to the market today, there was some very positive economic news. Westpac Banking Corp (ASX: WBC) released the Westpac-Mi consumer sentiment index which surged to its highest level since January 2014.

With consumer confidence levels above 100, it is an indication that the number of optimists now outnumbers the pessimists. Higher levels of consumer confidence can lead to increases in consumer spending, which will be great news for many companies on the ASX.

One in particular is Retail Food Group which is the master franchisor of brands such as Gloria Jean’s, Donut King, and Michel’s Patisserie. Coffee and donuts may be essential to some, but for most consumers they are a luxury that is likely to be skipped when they are attempting to tighten the purse strings. In my opinion these brands will all benefit from consumers being more confident about the economy and spending freely.

Today’s data release could be an indication that the strong earnings growth we have seen from Retail Food Group this year is sustainable. For its half-year period Retail Food Group managed to increase its net profit after tax by 27% to $32 million. This was largely thanks to an increase in same-store sales and average transaction value of 1.7% and 3.7%, respectively.

If consumer spending does in fact ramp up then I see the company being in a great position to produce bumper full year earnings. In the second half of its fiscal year the company plans to grow its store network of 2,509 outlets by a further 250 outlets. This could well prove to be a lucrative move that creates a great return on investment.

Although today’s gains mean the share price has risen 25% so far in 2016, I still believe there is room for a lot of growth in the future. Its shares are changing hands at just 13x estimated FY 2016 earnings presently. Which I believe is on the cheap side when you consider its growth prospects and the estimated fully franked 5.1% dividend it is expected to pay next year.

I feel Retail Food Group is one of a couple of shares that I would consider a must buy today. The other being Premier Investments Limited (ASX: PMV). Both possess strong brands and have aggressive expansion plans which should set them up for long-term growth that helps them outperform the index over the next few years.

If you’re looking for more ideas like Retail Food Group then take a look at these shares which could well be considered must buys as well. I believe they too could provide investors with strong gains and market-beating dividends.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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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