Digital Transformation And Dine-In Expansion Will Drive Success

Key Takeaways

• Strategic focus on dine-in traffic and new product introductions aims to diversify income and drive revenue growth.
  
• Digital transformation and cost reduction efforts target operational efficiency and profitability improvements across regions.
  
• Operational challenges in Indonesia and flat same-store sales in India, combined with pricing strategy pressures, threaten profitability and long-term growth sustainability.

Catalysts

Together with its subsidiaries operates quick service restaurant chains in India and Indonesia.

• Strategic focus on increasing dine-in traffic post-COVID-19, which is essential for revenue growth as dine-in sales continue to remain positive.
  
• Introduction of new products and innovations, like the chicken puff, and ongoing café expansion are expected to attract more customers and diversify income streams, positively influencing revenues.
  
• Significant investment in digital transformation, including the implementation of self-ordering kiosks and mobile app-based ordering, is intended to streamline operations and increase order processing efficiency, potentially improving net margins.
  
• Emphasis on improving delivery business profitability by negotiating better terms with partners and optimizing menu pricing, aiming to improve net margins and earnings.
  
• Cost reduction initiatives in Indonesia through store rationalization and improved rent negotiations are expected to move the region towards profitability, which could enhance overall company earnings.

Restaurant Brands Asia Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Restaurant Brands Asia's revenue will grow by 17.4% annually over the next 3 years.
• Analysts are not forecasting that Restaurant Brands Asia will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Restaurant Brands Asia's profit margin will increase from -9.7% to the average IN Hospitality industry of 13.7% in 3 years.
• If Restaurant Brands Asia's profit margin were to converge on the industry average, you could expect earnings to reach ₹5.6 billion (and earnings per share of ₹11.05) by about April 2028, up from ₹-2.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.2x on those 2028 earnings, up from -14.1x today. This future PE is lower than the current PE for the IN Hospitality industry at 33.2x.
• Analysts expect the number of shares outstanding to grow by 0.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.35%, as per the Simply Wall St company report.

Restaurant Brands Asia Future Earnings Per Share Growth

Risks

• The focus on Indonesia showcases ongoing challenges, including the geopolitical climate and store closures, leading to a negative impact on revenues and company EBITDA losses in the region.
  
• Although India is seeing revenue growth, the negative or flat same-store sales growth (SSSG) poses a risk to sustainable improvement in revenue and market penetration.
  
• The significant investment in the digital transformation process may face challenges in adequately translating to increased traffic and sales if not effectively managed or embraced by customers.
  
• Continued reliance on aggressive value propositions, such as pricing strategies, may compress net margins, impacting overall profitability in India if not balanced adequately with premium offerings.
  
• The ongoing necessity for tight G&A control and optimization highlights potential risks in managing cost structures that could affect net earnings if operational efficiencies are not achieved.

Valuation

• The analysts have a consensus price target of ₹92.273 for Restaurant Brands Asia based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹135.0, and the most bearish reporting a price target of just ₹65.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹40.7 billion, earnings will come to ₹5.6 billion, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 16.3%.
• Given the current share price of ₹69.27, the analyst price target of ₹92.27 is 24.9% 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.