Restaurant Valuation Case, a group presentation for the financial statement analysis class... October 2012

1. valuation ratios in the restaurant
industry
katherine koh, zac loo, rahul mishra & ying zhou

2. • Relatively low start-up costs
• Low technical skills required
• High personal desire
• Money can be spent on other leisure
activities
• Can spend money making food at
home
• Raw materials face competition
• Effectively commodity inputs
• Switching cost are effectively zero
• Public opinion can destroy reputation
• Social media increases customer’s
voice • Most look for point of difference
• Everyone wants everyone else’s
customers
porter’s forces

3. demand growth
25%
46%
53%
0%
10%
20%
30%
40%
50%
60%
1955 2000 2010
% of food dollars spend away from the home

4. overview
company a – international franchise operator
company b – international steakhouse
company c – u.s variety and cake wholesale
company d – u.s. airport restaurants

5. comparisons
company

6. aa franchisefranchise bb steakysteaky c!c! cakes!cakes! dd airportairport
Type of food Variety Steakhouse Variety Branded variety
Restaurants 1,500 269 64 148
% Owned 24% 100% 100% 100%
% Franchised 76% - - -
New stores
p/year
100 3 14 21
Countries 9 2 1 1
Average
cheque
$10.25
$17.50 (Dinner)
$12.50 (Lunch)
$15.78 -
Target market All ages 25-54 - -
Differentiation Hometown Texas Upscale, casual Airports
comparisons
company

7. first impressions…
Company A was the only company who could access debt
Everyone else had negative net financial leverage
Due to high cost of getting debt?
Company A is potentially the rising star
Who is the falling star?

8. driver of company’s
pb & pe multiples?
ZAC
current returns
are they performing well?
have they slumped?
are there returns headed up or down?
driven by fundamentals - sales growth, cogs
growth prospects
is demand growing?
have the results tended up or down?
off-balance sheet items
internally generated brand value
risk profile

9. match the price-to-book equity valuation
multiple with each of the four restaurant
businesses puzzle!!
Rahul

10. about pb/pe matrix

11. annual sales growth

12. restaurantrestaurant
price/bookprice/book
valuevalue
reasoningreasoning
a franchise 3.9
falling star - high current return,
low growth
c cakes! 4.4
rising star - high growth, high
current return
b steaky 1.0 dog - low current return/growth
d airport 1.0
recovering firms - rebounding
returns, high growth

13. Match the price-to-earnings valuation multiples
below with each of the four restaurant businesses discussed
above. Another game!!
Grace

14. Net Operating Profit After Tax (NOPAT)

15. restaurantrestaurant price/earningsprice/earnings reasoningreasoning
a franchise 20.0
falling star - has hit a peak and now
has less growth opportunities
b steaky 9.6
dog - has low growth, and low
returns
c cakes 34.5
rising star - has strong results and
shows further growth potential
d airport 28.0
recovering firms - high growth, still
reestablishing returns

16. your three takeaways
• limitations given comparable firms within a given
industry
– differing business models
– differing revenue streams
– different risk profiles
• issues with ratios vs. scale
• use more than one ratio

17. questions?