Brazil Fast Food: A Restaurant Chain With Staying Power

 |  Includes: BOBS, EWZ
by: Violent Capitalist

It's hard to find a Brazilian, actually any emerging market, consumer-centric company that lacks a strong valuation trading stateside in the US. Brazil Fast Food (OTCPK:BOBS) is such one company that has some serious, organic long-term prospects without much in the way of long-term growth of Brazil.

Brazil Fast Food basically is an operator/licensor of it's Bob's fast food; they are like a Brazilian version of McDonalds (NYSE:MCD) but with a high presence at national events (Carnivale, Panamerican Games, etc). They have been exploring a few avenues of growth since 2007, one being the expansion of Bob's to other countries in South America. Another avenue has been signing agreements to franchise/license other brands like KFC (NYSE:YUM), Pizza Hut, and Doggis. This is a great strategy in my point of view, because they targeted 4 distinct growth brands that can coexist.

Bob's brand name in Brazil is not one to be understated. According to Wikipedia (not the greatest source, but I think its accurate) McDonald's operates about 560 stores in the country, compared to Bob's 610! Just for your information, McDonald's sold its Latin American businesses to a franchisee as well. Another fact, is that Bob's states that it is the 2nd largest hamburger chain, so take these numbers with a grain of salt if you will.

Regardless, my point is that Bob's has staying power. A national brand in a growing nation that is seeking growth opportunities. That's a great mix, and it's hard to believe why this company is trading at a discount to the restaurant chain universe. With a market cap of 92mil real ($50mil in USD, 1.87 exchange rate), cash of about 14mil real, and debt of about 12mil real, enterprise value totals 90mil. There have been some operating issues, but the company itself pointed this out in its 10-k and addressed it by hiring Jorge Aguirre to specifically address these issues. I believe that the company will hit 10mil real in income this year. That already is a PE of less than 10.

But I look at cash flows, and adding back D&A of 6million real gives operating cash flows of 16mil real. Capex should total about 10mil real, and I forecast that 4mil will be on maintenance capex and 6mil will be for expansion. 16mil-4mil = 12mil real, so the EV/FCF valuation of this company stands at 7.5x. Most fast food chains stand at around 10-15x, so already they are potentially 50% undervalued.

Furthermore, I also like to forecast growth based on ROIC's and the amount being spent on capex. With an ROIC of 20% and 6mil real being spent on growth, conservatively this company can grow income by 1.2mil Real per year. In 5 years that can total 6mil, making my projection of FCF in 5 years at 18mil. You can forecast maintenance capex growing 50% as well to 6mil. So the final FCF number stands at 16mil. A 10x FCF valuation is reasonable in my book and I forecast a valuation of 160mil real or about $90mil USD, which translates to about $11/share.

One huge caveat is that Brazil's real is volatile. It moves a lot and it will affect your valuations. I also believe that as the company grows it will seek listing on an exchange, which will help it reach parity in terms of valuations with its peers.

Conservative Fair Value: $9
Strategy: Buy BOBS at $6 at 1/3 of a planned allocation

Disclosure: Long BOBS.OB