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