Forum Archive Index - October 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Share price wise, things are moving a little faster than I expected.    I 
see that my guesstimated 52 week share price target band of $1.35-
$1.40 for RBD was almost reached today after a mere two weeks.  Add 
in the projected annual dividend and I am looking at a nice 20% plus 
annual return on those shares I bought in late September at $1.25 
already.

The more I study the RBD share price chart, the more I am convinced 
that it has almost no value.    I know that statement will annoy some of 
those chartists out there, so I had better explain further.    Over the last 
year RBD has been in a trading range of $1.25 to $1.60 approximately.

It is in the nature of charting that entry into a share is always late as it 
bounces off a support level.    All a late entry does is reduce your 
potential profits, when it seems obvious to me that entry to RBD at 
around $1.25 is a very low risk transaction.   Why wait to buy in later 
when the risk of losing capital is clearly higher?

The other 'problem' with charting this share is that the share price 
movements (in hindsight) do not seem to relate to any developments 
within the company.   In other words share price movements seem to 
be essentially random and unrelated to underlying performance.  It is 
very difficult to be an F/A person then use T/A to select an entry point 
in such circumstances.

IMO there are far too many punters in there pushing the RBD share 
price around for no good reason.    From the fools who suggested that 
because RBD had breached the support level of $1.25 that it should be 
sold, to the fools that paid over $2.00 a share last year, based on the 
spin that Australia was going to be one big cash creation party.     
(Before any sharechatters get upset at those remarks, I should point 
out that I include myself in that latter category of fools, so I'm not trying 
to score any points here.)

Macdunk wrote on 2nd October

>
>RBD sell the premises to expand In Australia .   Lets take a closer
>look The people buying would want at least 10pc plus a capital gain 
>minimum.
>Question number one  Why not borrow against what already Is 
>owned to finance a great prospect?
> 

possibly partially prompted by this earlier post of my own.....
 
Snoopy wrote on 26th September 2003 
>
>$52.1m worth of property, now rented,  on an 11% yield means a rent 
>bill of $5.73million that wasn't there before.  Assuming borrowings are 
>being paid for at a 7% rate, and that $52.1million from property sales 
>has gone straight back to paying off debt, then loan interest saved as 
>a result of the sales will be $3.65m.  The net effect is a $5.73m-
>$3.65m= $2.08m annual rent bill to pay.  Spread out over 94.8 million 
>shares means gross profit is reduced by 2.2c per share as a direct 
>result of this transaction.  The NPAT effect is that the profit is reduced
>by 0.66x2.2c= 1.4c per share.
> 

Winner has directed us to an earlier RBD press release, dated 21st 
December 2001 which makes some interesting points:

"Restaurant Brands has, since inception, had a policy of investing in 
store decor, fit out and equipment to sustain and build the in-store 
experiences for our customers."

"This policy has never included the real estate on which the stores are 
located because the company believes that a better return can be 
made by investing in in-store assets rather than in commercial real 
estate."

"As at 09/2001 the company had nearly 200 stores across our 3 
brands.  All Pizza Hut and Starbucks Coffee stores and 30 KFC stores 
were leased while 57 KFC stores were owned outright."

The point I am making here by using this quote is that RBD wasn't just 
flogging off the dog kennel (as Macdunk so eloquently put it) when 
they sold those KFC stores, because most of their stores were 
*already* flogged off (or more correctly, never owned anyway).

Continuing the quotes from this press release, on the effect of the KFC 
property sales:

"2.  An ongoing reduction in KFC earnings (EBITDA) of $4.7m pa 
(subject to future rent reviews) comprising the rentals which will be 
paid on the KFC stores sold.  This equates to about 2.7 margin points 
and will lower KFC EBITDA margins to 17.5-18.0% from the current 
performance of in excess of 20%."

$4.7m equates to an extra cost of 5.0c per share based on 
94.18million shares.

"3.  An ongoing reduction in depreciation costs of $1.8m pa, with the 
reduction in depreciation costs of $1.8m pa, with the reduction in the 
fixed asset base."

Depreciation costs of $1.8m equates to 1.9c per share, based on 
94.18million shares.

"4.  An ongoing reduction in interest costs of $3.5-4.0m pa to the 
extent that the funds continue to be used to reduce debt."

$3.5-4.0m equates to a 3.7-4.2c per share saving (based on 
94.18million shares).

According to my addition the net cost to RBD of the KFC land and 
building sales transaction is:

5c-(1.9c+[3.7 to 4.2]c) = a *gain* of 0.6c to 1.1c per share.   In other 
words the property sales have been earnings positive from day 1.   In 
answer to Macdunks's assertion that the buyers of those properties 
would be seeking a 10% plus annual return:

"TOTAL  (property sales)   $53.780m       (Yield)   8.78%"

It looks like those property investors were happy to grab a property 
return of under 9%.

In my own analysis I assumed a spread of 4% between rental yields 
and bank borrowing rates.   Perhaps that spread was a bit high?
No matter, I think the direct cash benefits of selling those stores will 
diminish over time.

As for the question why didn't RBD borrow against the property to fund 
their expansion?    The answer is, because of the amount of long term 
debt on the books, the net position was that RBD didn't actually own 
the properties anyway.  By selling the KFC properties, and using the 
sales proceeds to reduce debt, the borrowing capacity of RBD was 
actually enhanced.

"Question number five when was the last time you heard a kid say they
wanted one of there products."

A fair point.   With the number of 'Subway' stores springing up in 
suburbs and small towns I am sure that KFC have taken a hit.   But 
then again this must be part of the reason RBD shares are so relatively 
cheap.

"Question number seven would you be dumb enough to buy In?"

Please pass the dunces cap.   I will wear it proudly.

And now moving onto Morgy's comments of 4th October

>
>The result of that was that snoopy has spent over 2 years investing in
>a company in which a sizeable profit was available and he chose not 
>to take it."
>

Only with hindsight.  If you believed the Australian spin, and for a while 
I did, it wouldn't have been extraordinary to draw up a case for a share 
price of $3.    Balance that against the risk of sinking towards the pre-
expansion support level of $1.25 and $1.30 and making a clear cut 
decision to sell was not as obvious a winning strategy (at the time) as 
Morgy implied.

>
>and confirms that he would have done better with his money in the 
>bank, i.e  virtually no risk versus a sizeable risk.
>

Cherry picking the squashiest cherry tomato in my basket is unfair.   It 
was on record on this site that my income share portfolio increased by 
20% pa over a two year period *despite* me owning RBD as part of it.    
That is a far better performance than 'money in the bank'.

>
>Snoopy should have really written something like this, " RBD was a 
>good company on a growth path with a good dividend ,
> make sure you grab the growth profits before the management 
>ruin the company as they invariably do", but because of his
>penchant for falling in love with companies,  on my low risk
>scenario he left 20K on the table. 
>

Perhaps I paid too much attention to the hype in the RBD press 
releases.   Perhaps I just talk about RBD too much?  Either statement, 
I think, is fair comment.    But falling in love with RBD?   Not a fair 
accusation.  I have never let RBD form a disproportionate part of my 
own share portfolio.

>
>And I think you will agree that it will be some time before RBD finds 
>its way to those dizzy heights, his posts now refer to ensuring that  
>they can pay the dividend.   A total waste of time if you ask me.
>

I have already posted that I don't care if RBD ever gets to the $2 mark 
again.   Going forward from here, I am quite happy to see RBD sitting 
on $1.25 forever, provided those dividends keep rolling in.     I see 
that, despite the doomsayers, the interim dividend has been 
maintained and it is fully franked, just as my detailed F/A research 
published over the last month on 'sharechat' predicted.  If you think 
that raking in a 12% dividend return is "A total waste of time"  my 
prediction Morgy, is that 'long term' you will go broke chasing your 
ridiculously inflated expectations.    Make no mistake I wouldn't wish 
such a fate on you Morgy, but all the signs are there.

SNOOPY

discl: hold RBD













--
Message sent by Snoopy 
on Pegasus Mail version 4.02
----------------------------------
"Sometimes to see the wood from the trees, 
you have to cut down all the trees."




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