Digital Expansion And Portfolio Simplification Will Support Stronger Long-Term Earnings Quality

Catalysts

About Retail Food Group

Retail Food Group operates and franchises multi brand quick service and café networks, underpinned by vertically integrated coffee and bakery manufacturing.

What are the underlying business or industry changes driving this perspective?

• Acceleration of digital ordering, e commerce and delivery from a very low base, where digital checks are more than double in value, may support like for like sales and expand gross profit as fixed costs are leveraged.
• Portfolio simplification through divesting Brumby’s and exiting loss making corporate stores is redirecting capital and management time to scalable brands, which is likely to support higher group EBITDA margins and free cash flow.
• Structured international expansion for Gloria Jean’s and the staged rollout of Donut King into new territories using a capital light master franchise model can increase royalty revenue and improve earnings resilience over time.
• Rapid scaling of Beefy’s via a shift from company owned to franchised outlets, supported by strong brand momentum and vertical integration, may grow network sales while lifting segment EBITDA margins and reducing capital intensity.
• Introduction of Firehouse Subs into an underpenetrated premium sandwich category, backed by committed growth capital and clustered company stores in Queensland, has potential to create a new revenue stream and enhance consolidated earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Retail Food Group's revenue will decrease by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -10.8% today to 12.4% in 3 years time.
• Analysts expect earnings to reach A$15.0 million (and earnings per share of A$0.23) by about December 2028, up from A$-14.9 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as A$21.1 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 15.0x on those 2028 earnings, up from -6.6x today. This future PE is lower than the current PE for the AU Hospitality industry at 32.0x.
• Analysts expect the number of shares outstanding to grow by 1.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.63%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Consumer discretionary spending remains fragile despite some Q4 improvement, and a prolonged weak retail environment could cap transaction volumes across brands, limiting network sales growth and constraining revenue and EBITDA expansion over the long term.
• The strategy to accelerate Beefy's and Firehouse Subs through company stores and then franchising concentrates capital and management attention in a small geographic footprint, so if those concepts fail to achieve scale or attractive unit economics, group earnings and net margins may fall short of expectations.
• Ongoing portfolio restructuring, including the transition or closure of corporate stores and the attempted divestment of Brumby’s Bakery, carries execution and timing risk, and if sale proceeds disappoint or closures drag on, lease provisions and restructuring costs could continue to weigh on statutory profit and free cash flow.
• Digital channels are currently a small share of transactions despite higher average order values, so if RFG fails to materially shift customers toward e commerce and delivery while competitors deepen their digital engagement, the group may miss a key secular growth driver, limiting revenue growth and margin leverage from higher value digital checks.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of A$2.55 for Retail Food Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be A$120.5 million, earnings will come to A$15.0 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 10.6%.
  
• Given the current share price of A$1.57, the analyst price target of A$2.55 is 38.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.