After market closed, MTY Food Group (TSE:MTY) posted second quarter Revenues of $38.4 million, EBITDA of $13.4 million and EPS of $0.44 versus our estimates of $35.5 million, $10.9 million and $0.33 versus consensus of $34.3 million, $12.0 million and $0.37 respectively. The solid earnings were largely the result of higher than anticipated ($1.5 million) profitability generated from the acquired Manchu Wok corporate stores. We note that franchising process remains underway with 9 franchised this quarter (4 closed).
Same store sales growth remained at -0.1% versus our forecast of increased by 1.0% and increased by 0.7% last quarter. As was the case from last quarter, by banner, Mr. Sub, MuchoBurrito, TacoTime, and Valentine generated solid traffic, in part driven by banner specific initiatives. Of the larger eight concepts, 5 reported positive same store sales (ranging from increased by 0.5% to increased by 7.0%, averaging increased by 3.5%) and 3 negative same store sales (ranging from -0.2% to -4.9%, averaging -2.3%).
We note that March and April generated positive same store sales growth, while May experienced a decrease. According to MTY, Alberta and Saskatechewan experienced same store sales decreases in the month of May. Western Canada accounts for roughly 25% of system sales. We are modelling same-store sales growth of increased by 0.5% for the remainder of FY 2015 and increased by 1.0% for F16.
MTY closed 45 net stores (32 openings / 77 closures) for the quarter versus 22 net store closings (27 openings / 49 closures) last quarter. Approximately half of the closures were concentrated in two banners. Moving forward, we expect openings to accelerate and for store closures to decrease and are modelling no net store closures for second half of 20FY 2015 and net openings of 40 for F16.
EBITDA margins for the quarter remained at 34.9% versus our forecast of 30.6% driven specifically by: (1) higher profitability from the recently acquired corporate stores, (2) lower contribution from turnkeys, and (3) higher franchising contribution.
Since 2006 MTY has finished 16 acquisitions in the Canadian foodservice space at an forecasted average acquisition multiple of 6.3 times LTM EBITDA and an average 3.4 point acquisition discount to MTY’s trading multiple at the time of the acquisition. We forecast the firm will be in a net cash position in fourth quarter of 20FY 2015 and believe additional acquisitions to be funded by cash on hand or debt. Our estimates assume no acquisitions over our forecast horizon.
We expect MTY is looking to expand its footprint in the US with a sizable acquisition (leverage of 2.5 times to 3.0 times EBITDA). The firm is targeting large scale M&A in the US to leverage the target’s systems for an accelerated roll out (40-50 new store openings versus recent capacity for 5-10) of its champion banners (Thai Express/ Sushi Shop/ Jugo Juice). We expect the primary acquisition criteria include: (1) profitability (MTY will not purchase declining store network with the intent to turn-around), (2) high quality of franchisees (in-depth local/ regional knowhow), (3) low levels of competition, (4) access to quality real estate locations and (5) ability to realize volume/procurement rebate synergies.
We have made moderate adjustments to our FY 2015 and FY 2016 estimates. Our one year target remains stable at $38.00 per share.
MTY is presently trading at 13.0 times Enterprise value/EBITDA (FY 2015 estimate) versus its highly franchised peer group trading at 16.8 times in spite of its under-levered balance sheet (net debt to EBITDA 15 estimate of 0.1 times versus the group of 2.3 times) and industry-leading FCF and return metrics. We expect this valuation gap, representing $10per share of upside on today’s price, could narrow. We like MTY given expectations for persisted growth via accretive acquisitions, an under-levered balance sheet, and structure in place to do $2 billion in system-wide sales.