New Experiential Dining Expansion Will Drive Long-Term Upside For This Undervalued Restaurant Group

Catalysts

About Sphera Franchise Group

Sphera Franchise Group operates a diversified portfolio of leading quick service and casual dining restaurant brands across Romania, Italy and the Republic of Moldova.

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

• The rollout of the Hard Rock Cafe network and further expansion of Taco Bell and KFC in underpenetrated cities is set to lift average ticket and transaction volumes, supporting a structural acceleration in revenue growth and earnings from 2027 onward.
• Increasing consumer appetite for branded dining and experiential concepts, including Hard Rock Cafe and Cioccolatitaliani, positions Sphera to capture a larger share of discretionary spend as real incomes normalize, which may drive higher same store sales and net profit.
• The ongoing shift toward multichannel consumption through drive thru, mall food courts and delivery allows the group to monetize its brands across more dayparts and occasions, which may improve sales density per restaurant and operating leverage at the EBITDA level.
• Disciplined cost control, menu engineering and scale based purchasing are expected to help manage input cost pressures over time, which could support a gradual recovery in restaurant operating margin and net margin.
• The strong brand equity of KFC and the rapid adoption of international QSR concepts in markets such as Moldova and Italy support long run traffic growth, which may contribute to sustained revenue expansion and rising normalized EBITDA as the network matures.

Assumptions

This narrative explores a more optimistic perspective on Sphera Franchise Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Sphera Franchise Group's revenue will grow by 12.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.7% today to 4.5% in 3 years time.
• The bullish analysts expect earnings to reach RON 98.4 million (and earnings per share of RON 2.55) by about December 2028, up from RON 57.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 29.6x on those 2028 earnings, up from 25.5x today. This future PE is greater than the current PE for the RO Hospitality industry at 25.3x.
• The bullish analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.07%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent macroeconomic stagnation, high inflation and repeated tax rises in Romania may structurally depress real disposable income and discretionary spending on eating out, limiting traffic growth at mature brands such as KFC and Pizza Hut and constraining long term revenue expansion.
• Structural wage inflation and tight labor markets in core geographies could keep payroll and employee benefits growing faster than sales, compressing restaurant operating profit and putting sustained downward pressure on normalized EBITDA and net margins.
• Ongoing volatility in poultry and other key food input prices, amplified by epidemiological shocks and energy costs, may prevent the group from fully offsetting cost of goods inflation through menu engineering and price mix, eroding gross profit and ultimately reducing earnings.
• Rising competitive intensity in delivery and casual dining, combined with shifting consumer preferences away from weaker legacy concepts such as Pizza Hut and from perceived premium delivery occasions, may cap like for like growth and drag on portfolio level revenue and profitability despite the outperformance of Taco Bell.
• The long dated rollout of new experiential brands such as Hard Rock Cafe and Cioccolatitaliani, with limited contribution expected before 2027 and a heavier upfront cost structure, increases execution risk and could result in subscale operations that dilute group level EBITDA margins and slow earnings growth.

Valuation

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

• The assumed bullish price target for Sphera Franchise Group is RON48.3, which represents up to two standard deviations above the consensus price target of RON41.64. This valuation is based on what can be assumed as the expectations of Sphera Franchise Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of RON48.3, and the most bearish reporting a price target of just RON30.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be RON2.2 billion, earnings will come to RON98.4 million, and it would be trading on a PE ratio of 29.6x, assuming you use a discount rate of 16.1%.
  
• Given the current share price of RON38.0, the analyst price target of RON48.3 is 21.3% 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.