Brazil Fast Food Corp.: Strong Q3 Results Provide Further Reason To Vote No On The Buyout

Nov.19.13 | About: Brazil Fast (BOBS)

If you have already voted, it is not too late to change your vote.

Brazil Fast Food Corp. (OTCPK:BOBS) reported excellent third quarter operating results today. This further solidifies the case that management's $15.50 offer price is far below the proper value of the stock. At this point, it is obvious why management wants the company so badly: BOBS is firing on all cylinders and management is doing an incredible job of operating the company even as competition intensifies at a rapid clip. With that, I tip my hat to them but as minority shareholders, we should seek to remain business partners with Mr. Bomeny and his team or at the very least, require them to compensate us properly for what we are giving up.

Here are some highlights from the quarter (copied/pasted directly from the quarterly financial statements on BOBS website):

  1. "On September 30, 2013, the Company had approximately 1,007 franchised points of sale (approximately 952 on December 31, 2012)"
  2. "Net restaurant sales for Company-owned retail outlets for the three-month periods increased by R$13.7 million, or 31.6%, to R$57.0 million for the three months ended September 30, 2013, compared to R$43.3 million for the three months ended September 30, 2012"
  3. "KFC's restaurant sales increased 9.7% in the nine-month period ended September 30, 2013 compared to the same period in 2012" (BOBS-owned KFCs)
  4. "Pizza Hut's restaurant sales increased 5.5% in the nine-month period ended September 30, 2013 compared to the same period in 2012" (BOBS-owned Pizza Huts)
  5. "Net franchise revenues increased R$ 4.6 million, or 14.9%, to R$35.6 million for the nine months ended September 30, 2013, from R$ 31.0 million for the nine-month period ended September 30, 2012"
  6. "This increase is attributable to the growth of the franchise business from 916 retail outlets on September 30, 2012 to 1,007 on September 30, 2013"
  7. "During the nine-month period ended September 30, 2013, Bob's brand closed 24 points of sale and inaugurated 80 points of sale, achieving 955 points of sale"
  8. "For the quarter ended September 30, 2013, we had net cash provided by operating activities of R$29.9 million (R$13.7 million in 2012)"

By all means, the quarter was a slam dunk. BOBS even reported interest income of $230,000 which is good for roughly 10c/share in after-tax annual EPS, and something that will continue to grow and enhance shareholder value as the company's cash balances continue to grow (Brazilian banks are paying 8-10% on deposits and lending to BOBS at 11-12% resulting in net positive interest income as the company is earning interest on a much bigger pile of cash relative to its cost of debt).

Even better, sales growth easily outpaced the 5.9% inflation rate referenced in the report by management. Management pointed to two explanations for the incredible 28% year-over-year revenue growth rate… here is why they don't undermine revenue growth in the least bit:

  1. Rock in Rio apparently added $1.3m BRL in non-recurring benefits. This accounted for just 9% of quarterly revenue growth, and the growth rate remained at 26% after stripping it out. Note, management's language surrounding this item is confusing. In the word file from their website as well as the quarterly press release, management notes Rock in Rio had "results of approximately R$1.3m" but does not specify what metric Rock in Rio actually impacted (revenue or EBITDA?). Let's assume it was an impact to EBITDA… in that case, the company's EBITDA grew 34% instead of 40%, yet the stock trades at a substantial discount to ARCO and BKW.
  2. BOBS pre-sold sandwiches for the Catholic World Youth Conference. Management did not call out the impact of this event, likely because it is far less than $1.3m BRL. Let's assume it was that high though… BOBS revenue growth rate still remains above 23% in nominal figures and 17% in real figures.

And one other thing: in the quarterly report, management notes "the Company's sales were negatively impacted throughout the third quarter by continued countrywide civil unrest and protests, which forced stores to close earlier than normal for security reasons," yet revenue was still up by 28%! Incredible.

For the 9 month period ended September 30th, BOBS printed $0.89 EPS ($1.18 annualized) pricing the stock at a far too cheap 13.5x earnings multiple despite the powerful brand name, scale/purchasing power, and intelligent and focused management team. The shares are worth $25-$35 USD immediately if a reasonable 10-12x EBITDA multiple is applied to the stock, and likely over $60 by the time the Olympics arrive.

Shareholders, if you have already voted, it is not too late to change your vote. Call the numbers listed on your proxy cards or the company's proxy statement, and vote over the phone or online. The market is telling us something… the stock is already nearly 3% higher than the offer price. Downside: none, as the stock was nearly 10% higher the day prior to the announcement… Upside: substantially higher offer price revision, or if the deal falls through, you are offered the opportunity to remain a proud shareholder of a good business with a solid management team.

Disclosure: I am long OTCPK:BOBS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.