Pizza Pizza Royalty Corp (TSE: PZA)

Intro

Pizza Pizza Royalty Corp owns certain trademarks and trade names in its franchise-oriented restaurant businesses operated primarily in Canada. Of the more than 700 restaurants, the majority is franchised, where Pizza Pizza Royalty Corp earns royalty income equal to 6% of the sales of Pizza Pizza restaurants and 9% of the Pizza 73 restaurants

In short, a part of the sales (i.e. system sales) generated in the Pizza Pizza and Pizza 73 restaurants has to be shared with Pizza Pizza Royalty Corp – sounds confusing because there is just too many times the word pizza involved yet the methodology is fairly simple. Thus, an important driver is the ‘same store sales growth’ or SSSG which is, simplified, the organic growth rate of the restaurant portfolio. Annual SSSG was increasing yearly by roughly 1% to 3% from 2011 to 2016. Starting in 2017, however, this trend has been slightly negative and seems to be a key factor of the current opportunity the share price offers.

Valuation

Pizza Pizza Royalty Corp values its rights in the balance sheet with C$272 million for the Pizza Pizza rights and C$80 million for the Pizza 73 rights – a total of C$352 million in assets. On the other side of the balance sheet, there are borrowings of around C$47 million as of Q3 2019.

Sales shown by Pizza Pizza have been around C$115 million per quarter (i.e. royalty generated for Pizza Pizza Royalty Corp approx. C$6.9 million) and for Pizza 73 the sales have been around C$22 million per quarter (i.e. a royalty of approx. C$2 million). The sales and royalty numbers have been pretty steady over the past few years and it seems fair to take this as a base case, which results in an EPS of more than C$0.80 after adjusting for interest and taxes (also accounting for the exchangeable units). In other words, Pizza Pizza Royalty Corp can be bought for a P/E of roughly 12x and at roughly book value – not bad for a company that basically just collects cheques every month.

What’s next?

Pizza Pizza Royalty Corp is exactly the kind of company I am looking for: a ‘boring’ business model, a bit of complexity in terms of the exchangeable units which makes the company a bit more difficult to value and a sector (fast food) out of favour. As a result, the valuation looks quite compelling and the dividend yield of >8% is certainly appealing. Although there are no rumors currently whatsoever, there may be some long-term potential for a consolidation of food royalty companies in Canada – a potential acquirer might be Recipe Unlimited, a company that has also a stake in the Keg restaurants. That being said, shareholders are already well served with the current business and the substantial dividend payments.

Current Price

C$9.97 per share

Swiss Water Decaffeinated Coffee Inc (TSE: SWP)

Intro

Swiss Water Decaf is a company I have been following for a few years – they have made significant progress culminating in the completion of a new, bigger facility at the end of 2019. Swiss Water Decaf, as the name suggests, is a Canadian producer of decaffeinated coffee, using its SWISS WATER® Process to decaffeinate green coffee without the use of chemicals. The processed coffee is then sold to more than 50 countries, of which the lion’s share of the production goes to the USA, followed by Canada.

With the opening of a new European subsidiary in January 2019, the company is now also selling its specialty coffee overseas.

Total volumes shipped increased by 16% in the first 9 months of 2019, 11% in 2018 and 5% in 2017. Due to additional capacity coming from the new facility, new geographical markets and a consolidation of the decaf market, it is expected that volume trends continue to perform nicely.

Valuation

Swiss Water Decaf is a hidden gem with a market capitalization of only roughly C$60 million. The company has incurred some debt to finance the above mentioned expansion yet debt level is still on very manageable level and estimated to decrease now with completion of the new facility. Swiss Water Decaf generated approx. C$5.6 million in pretax operating cash flows in 2018 – a number which is expected to increase significantly with additional volumes in the next years.

A sustainable quarterly dividend of C$0.0625 per share is currently paid, which translates into a dividend yield of 3.7%. This reflects a decent and safe compensation in the current interest environment.

What’s next?

Swiss Water Decaf is a solid growth story with a robust balance sheet, and a clear strategy in a growing market. If the company is able to boost its sales as planned with the added capacity and making use of the operational leverage, the price per share should be trading at least around C$10.

Current Price

C$6.70 per share

Massimo Zanetti Beverage Group (BIT: MZB)

Intro

Massimo Zanetti is a world leader in the production, processing and marketing of roasted coffee, distributed in around 110 countries. The company, headquartered in Italy, operates 18 facilities across Europe, Asia and the Americas, and has a global network of around 400 coffee shops in 50 countries. Massimo Zanetti has been a consolidator of its market and is purchasing constantly smaller competitors, as was the case in 2018 with the acquisition of the Australian brand ‘The Bean Alliance’ for around €21 million and Nutricafés S.A. as well as Segafredo Zanetti Worldwide Italia S.p.A in 2016 for €44 million.

The chairman and CEO, Massimo Zanetti, indirectly still holds ~68% of the company following its IPO in 2015.

Valuation

In sum, Massimo Zanetti generates around €900 million in revenues per year. Historical net profits were in the area of €15 to 20 million, which is, compared to its current market capitalization of €203 million, a P/E of approx. 12x.

As of Q3 2019, the P/B stands at only 0.62x. Although the acquisitions have led to a higher amount of intangibles/goodwill and debt, leverage still looks alright. Or, looking at it from a different perspective, yearly EBITDA amounts to around €71 million while net debt is estimated to be €195 million in 2019.

The yearly dividend of €0.19 per share (€6.5 million in total; a dividend yield of 3.2%) leaves room for improvement and may be increased as was already the case last year.

What’s next?

While there is certainly no rush, it seems like that through the IPO, a bigger change in the company structure may happen in the coming years – a transition from a family run and controlled company to a ‘real’ listed company with higher trading liquidity. Until such a potential transition will be completed, shareholders are buying a decently valued company whose price is depressed by the low trading volume and dominant role of the chairman’s family.

Current Price

€5.92 per share

Kraft Heinz Co (NASDAQ: KHC)

Intro
The first company discussed is probably well-known for everybody: The Kraft Heinz Company. After the merger between Kraft Foods and Heinz (yes, the Ketchup maker) in 2015, the company had its struggles culminating in 2019 with impairment charges and a SEC investigation. Since then, a new CEO took office and the quarterly dividend was reduced.

Valuation
Even though sales have been declining slightly, net profits have hovered around $400 to $900 million per quarter which translates into roughly $3 billion net profits per year. Assuming the consumer behavior doesn’t change massively in the next few years, Kraft Heinz ought to be able to generate at least similar profits going forward. It is believed that EPS of at least $3.00 per share will be possible and sustainable, which turns into a P/E ratio of 10x, an attractive valuation for a quality food stock such as Kraft Heinz.
With total long-term debt of approx. $30 billion (and total assets of >$100 billion), the leverage of Kraft Heinz is not worrisome and provides them with ample of financial flexibility.
The current market capitalization of $38 billion is below Kraft Heinz’s book value of $52 billion as of September 2019. This represents an attractive P/B ratio of only 0.75x.

What’s next?
From a market peak of almost $100 per share in 2017, Kraft Heinz has tanked to roughly $30 per share. Coupled with attractive multiples and a current 5% dividend yield, this stock looks rather appealing. The big impairment charges appears to have been a one-off. It seems that a lot of negative news has already been priced in – a classical contrarian scenario – and the stock might be ready for some better than expected news in the next few years.

Current Price
$31.24 per share

What is this all about?

Dear Reader,

You may ask yourself, why should you read another blog about stocks and shares – there are already tons of them online where you can easily waste valuable time. 

This one is different, due to the following reasons:

1. Contrarian: The author of this blog doesn’t share common beliefs when it comes to the stock market. Time and time again the contrarian investing approach has been the only bulletproof method that has worked since the advent of public markets (and many times also in daily life).
2. Concise: The entries in this blog will be short and concise in order not to waste your time. There won’t be a historical write-up about the company discussed; rather, it is expected that the interested reader can do this on his or her own, if deemed useful.
3. Frequency: There won’t be any daily, weekly or monthly updates. If the author has something to tell, it will be published – if not, the blog will remain quiet. It is estimated that there will be on average only one post per month.
4. Hidden Gems: In general, big blue chips are very well covered and additional equity research doesn’t provide a lot of new insights. Although the companies discussed in this blog can have any size in terms of market capitalization, the majority of posts will be about smaller and medium sized enterprises, which are extremely difficult to find in the sheer unlimited universe of listed companies.
5. Buy or Sell: Candidates are described on a yes or no basis, i.e. the company is either cheap or expensive. If the company is just a hold, neutral or a placeholder on the watch list, nothing will be written about it.
6. Money: The author of the ideas presented has typically a stake (long or short) in the firms described – walk the talk, skin in the game. How else can you truly write about a company if there is no incentive?
7. Recommendation: Last but not least, nothing on this blog constitutes as a recommendation – do your own due diligence! While the honest opinion of the author is presented, there is absolutely no guarantee that everything pans out as planned; guys, this is about the stock market and not your daily commute to work.

This should do for now. I wish you a lot of fun reading my blog and hope there may be some ideas where you can profit from.

Yours sincerely,
Marcel