Restaurant Brands Asia’s slow recovery is worrying

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Restaurant Brands Asia Ltd (RBA), formerly known as Burger King India Ltd, has seen a slow recovery from covid. As a result, the stock is down 25.6% since the start of the calendar year on BSE. Sentiment is also muted toward other quick service restaurant operators. For example, shares of Westlife Development Ltd, which owns and operates McDonald’s restaurants, fell 18.3% in 2022.

But in the case of RBA, the pessimistic sentiment is more pronounced.

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This is due to the company’s 55% mall-centric portfolio and restaurant-centric model, which contributed about 70% to pre-covid revenue, analysts at Nirmal Bang Equities Pvt note. Ltd in a June 1 report. Simply put, greater exposure to these segments has weighed on the company’s overall recovery.

However, with covid cases dwindling and restrictions lifted, RBA is seeing a recovery in restaurant average daily sales (ADS), which stood at 96% of pre-covid levels in May. In contrast, delivery ADS exceeded pre-covid levels.

The company plans to expand its presence by adding stores. The number of stores at the end of FY22 was 315. In FY23, management is aiming to reach 390 stores and has guided same-store sales growth of 25% (SSSG). He sees 7-10% SSSG as of FY24. The guidance for FY24 has been revised upwards due to the increased momentum seen for BK Cafés.

RBA plans to reach the number of 200 BK Cafés by FY23 and 300 by FY24. The count stood at 35 at the end of FY22. Note that the BK Café is a high-margin business.

Apart from adding cafes and taking over restaurants, cost control measures would help RBA increase the Ebitda (earnings before interest, tax, depreciation and amortization) margin.

While this comment bodes well for the stock’s near-term outlook, the re-emergence of the coronavirus in key states like Maharashtra poses a risk to operations.

Additionally, with regards to operations in Indonesia, although covid-related restrictions will be lifted, margin recovery will remain a controllable key.

Against this backdrop, investors would do well to closely monitor the execution of store openings, as any disappointment on this front would be a drag.

Meanwhile, after the recent stock price correction, analysts say the stock is trading at a discount to its peers. However, the risks mentioned above should be monitored.

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