Regular readers of this column know my interest in following megatrends and relating them to stocks. By definition, these trends are well known but it is amazing how often the market underestimates their power and effect on company earnings.
Food consumption is an example. As I have written previously for The Bull, fast-food companies such as Domino’s Pizza Enterprises are being valued like technology stocks and food consumption is changing as more people order food online more often.
I read with interest this week about Domino’s push to gain regulatory approval for drones to deliver pizzas in Australia. Approval, if it happens, seems a long way off, so Domino’s might have to settle for autonomous robotic delivery vans in the coming decade. Snacking is another fascinating fast-food trend. More than 90 per cent of consumers in the United States snack at least once a day and just over half sometimes replace breakfast with a snack, according to a 2014 Nielsen survey.
About 21 per cent of consumers polled snack three to four times a day and the majority of them are women. Once considered a treat, snacks are increasingly becoming meal replacements for time-poor consumers and redefining how consumers eat.
Snacking is not just prevalent in developed countries. Some 55 per cent of Asian consumers surveyed said they replace breakfast with snacks. The most popular snack, chocolate, is followed by salty chips and cheese snacks.
Imagine how this trend will develop as billions of consumers in the emerging countries join the middle-class in the coming decade and include more salt and savoury snacks in their diet. And as obesity rates worldwide continue to climb as more snacks are consumed.
Rising demand for snacking in Australia is evident in the growth in 24/7 convenience stores that fill their shelves and fridges with salty, savoury and creamy treats. Vending machines that doll out high-priced snacks are also popping up in more public spaces.
Fast-food companies are adding more “loose change” items to their menus – $2 snacks for example – to attract teenagers after school who need their salty fix. As one fast-food entrepreneur told me: “Get the chips right and the teenagers will follow.”
Unfortunately, getting exposure to this snacking trend via ASX is hard work. Few fast-food companies or makers of snack goods are listed in this market. One I have covered in the past 12 months for The Bull, Retail Food Group, has rallied after a few tough years.
The New-Zealand based Restaurant Brands (RBD) and ASX-listed Collins Foods are clear beneficiaries of this trend. Their KFC outlets are superbly leveraged to growth in snacking through their bite-sized chicken and chips offering – and possibly better positioned than hamburger and pizza chains that tend to provide meal replacements rather than extra snacks.
RBD has publicly stated it wants to become a NZ$1-billion enterprise by turnover and market capitalisation within five years. That implies a doubling of the share price and continued strong growth in NZ and, increasingly, in Australia.
Macquarie’s Equities Research estimates 15 per cent of RBD’s KFC sales could be through an enhanced food/beverage breakfast offer as more consumers substitute their first meal with a snack. That will not please health experts, but KFC’s potential to become a bigger player in the breakfast market, an area in which barely registers compared to other chains – would boost sales.
RBD is also introducing KFC home delivery in NZ the next six months at about a third of its stores. That opens up another huge market as more people order food online and have it home delivered.
Macquarie believes RBD’s billion-dollar revenue target within five years, which implies a near doubling of the share price, is conservative. Its modelling suggests revenue closer to NZ$1.3 billion is possible. More than a third of the revenue target will come from further fast-food acquisitions in Australia.
In a research note this week, Macquarie wrote: “While we understand that doubling the revenue base will not necessarily double the market cap … we demonstrate that a NZ$10 price target within five years is achievable. In fact, if RBD were to hold its current trading multiple and executes on its acquisition strategy, a share price in excess of NZ$12.50 is possible.”
Care is need with RBD and market forecasts for its potential growth. Rapid expansion by acquisition, particularly in newer markets, brings significant execution risk. Also, the trend towards healthier food could stymie growth in its fast-food outlets, although for now fried snacks are clearly winning out over fresh fruit and salad in RBD’s market!
Macquarie’s 12-month share price target of $NZ6.50 for RBD implies a 17.5 per cent total shareholder return from the current price. A forecast PE of 19 times FY17 earnings is reasonable given RBD’s growth trajectory and compares to a PE of 51 for Domino’s, according to consensus analyst forecasts.
Chart 1: Restaurant BrandsSource: Yahoo
Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without taking into account individual objectives, financial situation or particular needs. Before acting on the information in this article you should consider the appropriateness of the information with regard to your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at September 21 2016.