Why I think Retail Food Group Limited shares are a bargain

Credit: zehhhra

Is franchisor Retail Food Group Limited (ASX: RFG) (“RFG”) a bargain?

It sure looks that way, after the company reaffirmed its forecast for 20% Net Profit After Tax (NPAT) growth in 2017, excluding acquisition and integration costs.

What’s more, the company reported it was considering further acquisitions and forecast 140 new outlet openings this year. In the first 19 weeks of trading, Same Store Sales (SSS) and Average Transaction Volume (ATV) were up 1.5% and 2.3% respectively.

Here are a few more of the highlights:

  • Master Franchise agreements granted with Gloria Jean’s, Donut King, and Crust about to enter the Northern England, Pakistan, and Myanmar markets
  • International outlet openings expected to contribute more than 50% of new openings
  • More acquisitions on the cards, with RFG looking closely at a dozen options at present
  • Coffee expansion underway with a variety of coffee products through multiple channels, including potential to use recently acquired Hudson Pacific (which doesn’t have a coffee offering) to offer coffee to its restaurant customers

So What?

This year marked Retail Food Group’s 10th year of listing on the ASX, and according to management’s figures, RFG has grown earnings per share and dividends at 16.2% per annum and 17.9% per annum on average for the last 10 years. In fact, earnings per share were 8.6 cents in 2006, and 37.4 cents in 2016 – a 434% increase, and a sterling result.

Furthermore, Retail Food Group appears to be finally updating a number of its core franchises in order to keep them relevant. Donut King has received a couple of new products recently and is also launching a new range of ‘Instagram-worthy’ donuts, which I assume are designed to match Krispy Kreme‘s style of offering.

Gloria Jean’s is getting a drive-through, Brumbies is getting a pilot digital loyalty program, and Michel’s Patisserie has gained the ability to: “Utilize new technology to reproduce licensed images, personal photographs and tailored messages, using wholly edible materials, for application to Michel’s delicious cakes, all within minutes“.

With Donut King getting its biggest product change in more than 30 years, it’s not hard to see that some of these changes could rejuvenate the franchises for growth in the future.

It also looks like more share issues are on the cards for Retail Food Group, which has medium levels of debt but shows no signs of slowing its acquisitive bent.

Now What? 

Previously, one of my chief concerns was that Retail Food Group has been neglecting the product offerings of its franchises. Today’s announcement lays that fear to rest, and with a 4.4% dividend, Retail Food Group looks like excellent value at today’s prices.

Big, Fat, Dividends

This company's dividend is almost the stuff of legends. Its reliable cash flows support a high payout ratio, and the company's stash of franking credits are the cherry on the top of the dividend cake. Based on the last 12-months of dividends, shares are offering a fully-franked 6.5% yield, which grosses up to a whopping 9.3%, when those franking credits are included.

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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.

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