In morning trade the Retail Food Group Limited (ASX: RFG) share price has edged higher after providing the market with its full-year earnings guidance.
At the time of writing the food and beverage company’s shares are up 2.5% to 80 cents.
What was in the update?
This morning Retail Food Group advised that it expects to report a statutory loss of approximately $87.6 million in FY 2018.
This takes into account the substantial impairment charges revealed at the end of last year, termination payments to its former managing director, and other one-off turnaround expenses.
It doesn’t include $3 million in anticipated international licence fee revenues that may occur before the end of the financial year.
On an underlying basis FY 2018 net profit after tax is expected to be $34.5 million, down almost 55% from $75.7 million in FY 2017.
In addition to this guidance, management provided an update on trading conditions.
Despite yesterday’s retail sales data pointing to a solid month of trade for cafes, restaurants and takeaways in April, Retail Food Group has not benefited. Management advised that its stores have continued to be impacted by difficult retail market conditions.
The business has also been negatively impacted by planned domestic outlet closures and the negative sentiment regarding both retail franchising and the company in particular.
What about its bank covenants?
There has been a lot of concern over whether Retail Food Group would breach its bank covenants.
Management has advised that it continues to maintain dialogue with its bankers and their advisers in regard to its expected FY 2018 result and forecast FY 2019 result. It plans to provide a detailed market update with its full-year results.
Should you invest?
Based on this guidance I estimate that Retail Food Group’s shares are changing hands at a little over 4x underlying earnings. Which certainly is cheap.
However, there’s no guarantee that its earnings will improve in FY 2019 and beyond. So, this could easily turn out to be a classic value trap.
Because of this, I would suggest investors avoid Retail Food Group and focus on other shares in the industry such as KFC operator Collins Foods Ltd (ASX: CKF), Domino’s Pizza Enterprises Ltd (ASX: DMP).
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Motley Fool contributor James Mickleboro owns shares of Collins Foods Limited. The Motley Fool Australia has recommended Domino's Pizza Enterprises 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 Scott Phillips.