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Restaurant Brands Asia – Weak consumer sentiments ruling VFM demand (Reduce, TP: Rs112)

RBA’s Q3FY24 print was below our expectations; standalone revenue/EBITDA grew by 20.5%/47.9% while PAT loss cut to Rs64mn. With 441 stores SSSG of 2.6% indicates continued weakness in consumer sentiments. With 334 BK café covering 76% store its ADS stood flat at Rs119K (-5.5% QoQ). Management alluded sharp focus on building traffic using VFM layer through menu innovation (Rs99/- meal) yielding good results. RBA said it is building price leadership and value credentials for Gen-Z and Millennials remains key priority. Geopolitical issues impacted Indonesia revenues to Rs1.6bn with ADS at IDR17.8mn (-1%) YoY, though RBA aims to strengthen operation with 163 BK and 25 Popeyes stores establishing relevant chicken menu and leadership in Burgers. Gross margin inched up to 67.1% (+76bp), yet higher employee/other expenses at +10.4%/+17.8% resulting in post-INDAS EBITDA margins at 15.9% (+294bp). RBA cuts SSSG guidance to 3% with ~67% gross margin in FY24. We tweak margin assumptions and maintain Reduce rating with a revised DCF-based TP Rs112 (implying EV/EBITDA of 14.1x avg. FY25E/FY26E).

Building consumer traffic through price leadership yielding SSSG at 3.5%

RBA reported standalone revenue at Rs4.5bn (+20.5%) YoY despite peak food inflation resulting in stretched consumer spends. With 441 stores (37 in Q3) RBA clocked ADS of Rs119K (flat YoY, -5.5% QoQ) and SSSG of 2.6% indicates continued weakness in consumer sentiments. Further 334 restaurants with BKCafe covering 76% stores saw Café ADS at flat at Rs16K. Management stepped up its investments to, (1) strengthen value-for-money credentials, new Rs99/- meals strategy, (2) Boss Whopper – LTO, Crunchy Chicken nuggets, and (3) enhancing user experience Kings Journey. Geopolitical issues impacted Indonesia revenues to Rs1.6bn with ADS at IDR17.8mn (-1%) YoY though RBA aims to strengthen operation with 163 BK and 25 Popeyes stores establishing relevance and credibility. The company aims to strengthen BKI operation by: (1) establishing burger leadership, (2) building relevance and credibility of chicken menu (being strong non-veg market), and (3) build dessert layer – King Fusion.          

Despite Flat ADS, lower milk inflation RBA managed its operating margin

RBA’s gross margin inched up to 67.1% (+76bp) led by, (1) higher operating leverage and (2) better product mix. Despite higher employee cost (+10.4%) and other expense (+17.8%) the company’s EBITDA grew 47.9%, settling post-INDAS EBITDA margin at 15.9% (+294bp). Restaurant EBITDA margin (Pre INDAS) came in at 12.2% (+180bp) YoY. BK Indonesia reported EBITDA loss at Rs0.3mn and management now targets to achieve cash breakeven in FY25. With ~5% of sales investments in marketing spends, despite strong pick up in value segment RBA targets to maintain gross margins at ~67% and cut its FY24 SSSG guidance to 3% from 6%. 

Valuation and risks

As argued in our QSR Thematic report, RBA‘s growth strategy revolves around (1) building value-proposition, (2) develop premium layer with whopper, and (3) extract efficiencies through operating leverage scale. We believe it has long way to catch up industry leader. However, incremental competition in QSR space, especially from McDonald’s would continue to impact RBA’s performance in our view. On cost front, we believe short term pain are not yet over as majority of raw materials (cheese, milk and packaging material) still remain elevated. Given strong demand for Burgers in India as well as in Indonesia we remain hopeful expecting RBA to turn PAT positive in FY26E, though premium valuation does not provide margin of safety. We tweak FY24E/25E earnings and retain Reduce rating with a revised DCF-based TP of Rs112 (implying EV/EBITDA of 14.1x avg. FY25E/FY26E). Key risks to our call prolonged weakness in demand, rising inflation in key RM/PM & higher competition.

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