mercredi 25 mai 2016

MTY Food Group (about their acquisition of Kahala Brand)

I was a shareholder of MTY Food Group in the past but I sold my shares some years ago because there wasn't enough growth for me.

But today, the company has bought Kahala Brand, a chain of fastfoods in the USA, for about 300 million dollars (US). It's a huge acquisition for MTY which is still a small cap. And that acquisition looks very promising.

A lot of companies make acquisitions. But not a lot of GREAT companies make acquisitions. And MTY is one of those very few great companies, with great operators and a CEO which is famous for his low salary (an exception in this business world full of crooks).

The acquisition looks to me like when Couche-Tard bought Statoil Fuel: the size of the company explodes with a single trade.

OK, it's a very big bite and there's some execution risks. Also, the company will have a big debt (the company has been debt-free for a long time). But Stanley Ma and his team have made a very good job in the past with their acquisitions. I trust them much more than many many managers.

I bought some shares today even if the stock rose by about 18%. At the actual price (about 42$), the stock has a forward PE of 24 which excludes the acquisition (the forward PE should now be 10-12). With a ROE of 17 and an average ROE of 20 in the last 20 years, this company looks pretty interesting.

People don't like to have that much details. They just want to hear: "Buy", "Sell" or "Top Pick". Well, for me, MTY is now a top pick and I wouldn't be surprised if Jason Donville would say the same on his next TV appearance.

11 commentaires:

  1. Jason already top picked MTY the last two shows. I agree with you.
    This is also like CGI buying Logica.

    Starting with the assumption that MTY could not do both I am little puzzled how they seemed so disappointed when St Hubert BBQ chose a Cara offer over theirs - which they said was similar financial ballpark.

    Just a month later, Stanley finds the "perfect match" in the US. I wonder if this is Plan A or Plan B...

    To me this one has so much more potential, synergy, scalability than buying a mature declining QC banner with no supplier synergy like Cara has with St Hubert.

    Like they say in sports, sometimes the best trades are the ones you don't make. Missing on st Hubert allowed MTYto pull the trigger on this one with from what we can read immense potential.

    MTY has been in my top 5 for four years. I woke up happy this morning!

  2. MTY is my biggest holding right now, and I plan to hold it for at least the next 5-15 years.

    Reason is simple, Stanley Ma is one of the best CEO in Canada.

    The only thing that will make me reevaluate my position is when he retire, still the culture will be in place for the next CEO (probably the CFO Eric Lefebvre).

  3. Agree etienne. Succession planning is a concern. I read that this is a one an show so one has to wonder what with happen when Stanley ma eventually does retire. I have seen the CFO Lebrebvre a few times on BNN so maybe the are grooming him. I don't work for the company to hard to gauge.

    Hopefully the management of Kahala stays on... I have no clue but as Stanley is over 65 maybe there is a side deal for Kahala to take over from Ma once he retires as a way to convince Kahala CEO to support MTY acquisition to its shareholders. As the two entities are of similar sizes, but US has much more growth, this could also make sense. Recall Ma saying this is the "perfect partner". Of course I am just speculating here...

  4. If Kahala CEO joins the Board and is made COO or President of the combined company, it could provide a clue. Of course maybe he will take the cash and leave. It is not clear yet. The transaction has to close first.

    I am surprised the stock is not jumping more. Once the debt is paid this is 2x the size of current MTY why only go up 18%... Interest on debut but this is a royalty co with no cap ex. They use free cash flow to make acquisition (now repay the debt) and care little about poor SSS as long as they suck the cash flow out of the business to increase the float and make more acquisition. Seems low risk

  5. How large of a position in your portfolio did you purchase? I bought into a 3.5% position yesterday as well around $42. I foresee higher highs as things play out and plan to hold until I have a reason not to.

  6. I like MTY food group. Solid management with great metrics. I will wait in the sideline for now since I am eyeing on Linamar at this time with my available cash but definitely one of my best picks.
    Thanks for sharing Penetrator.

  7. Hey just curious you mentioned you no longer prefer to invest in these companies that report on ebitda basis and it seems like MTY due to their acquisition nature generally will report on those metrics. Just wondering why you feel more comfortable with this investment than say a concordia healthcare?

    1. Many companies use EBITDA, but when they make actual profits, it's OK for me. CXR, VRX and PHM for instance don't make money.

      The problem is that EBITDA is a trick for many companies to hide the fact that they can't manage to get any earnings.

  8. Let's say everything goes well and they integrate this acquisition as well they did with the smaller one.

    In 2015, they did $50M in EBITDA, they now expect to make $90M.

    Before the acquisition they were trading around 33-34$, let's say 33.5. So the price/EBIDTA would be 33.5$ / ( 50682000$ / 19120567.0 shares)
    = 12.64

    So if we apply the same ratio 90000000 EBITDA / (2253930 new shares + 19120567.0 shares) * 12.64 = 53.2$

    But I think it would be fair to apply a lesser ratio (11 let's say) since the new debt goes from positive to quite a significant one : 55.22 / 12 * 11 = 48$

    Right now it's trading at 43.5$, so I would say this is fair, since we don't know what king of profit margin Kafka have right now, it could take a while to integrate and to get the margins to where MTY wants them to be.

  9. I think too that the actual price is fair given integration matters.

    But for the long term, it's a great buy in my opinion.